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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Timing is Everything

 
Originally written Jan. 31, 2014 I’ve updated this post to reflect the reality of how time affects perspective. I’ve added new comments in blue italics surrounded by parentheses.

Well it’s back to a topic that is very important to me, finances.

Going DownAs I write these words the stock market is a bit more than an hour from opening though you’ll read these words (because I’ll finish this post) after it opens. Based on the pre-market indicators today is going to be a down day (possibly very down). So far 2014 has been a down year with the Dow dropping 4.39% or 748 points and that doesn’t include whatever is in store for today. I for one hope it continues down. (Well it didn’t continue and as you read these words the Dow is up 3.82% for the year)

Wouldn’t it have been nice to sell everything on Dec. 31, 2013, the peak, and then buy it all back whenever we hit the bottom? (That would have been Feb. 03) It would have but it’s also impossible to know when those two events will occur, eveyone knows that. They say timing is everything in life but perfect timing is impossible when it comes to stocks. Since perfect timing is impossible then what about not so perfect, or just average timing? We’ll get to that in a second.

I gave up trying to time the market very early in my investing career but there is some wiggle room. Almost as soon as this new year began, I started selling stock. Not because I’m a clairvoyent investor but because I had to rebalance my portfolio anyway and rebalancing to me doesn’t mean selling and buying at the same time. Since the year began I have sold 3.2% of all my stock holdings and moved it to cash or bonds. (I’ve continued selling as the year went on and the markets have risen) That’s not a lot in the grand scheme of things and fits with my philosophy of buy and hold. I held onto 100% of my stocks during the 2008 collapse and subsequent recession and even added to my positions which paid off very well with 2008 seeing a 16% decline but 2009 seeing a 25% increase and 2010 seeing a 17% increase all while buying on the way up.

If you have a plan you can and should stick with it and that’s exactly what I’ve done and am doing. (My plan is to buy low and sell high – duh – but I rarely sell – the little selling I’ve done is very small compared to my holdings. More importantly I’ve been saving and it’s those savings that will allow me to buy when I beleive the time is right) Also very importantly, do not make big moves. 3.2% is not a big move but, if I’m successful, it will have a big impact many years from now, and that is what planning is all about.

Will I begin buying stocks at the exact right moment, when the market hits the bottom and things begin going up again? Absolutely not! But will I buy at a lower price then I sold? Yes. Will that growth compound over many years if I continue to hold? Yes. The timing is not when to sell but when to scale back buying and when to amp up buying.

My next post will be on my technique for rebalancing my portfolio.


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Passive Takes Work

 
hammockIf you know anything about me you know that the title of this post has nothing to do with being lazy or taking it easy.

Instead this post is about passive income but, unlike most articles, books, and blog posts about passive income I’m going to tell and show you that passive income is difficult, it takes work. There are a lot of financial bloggers who promote real estate as a panacea for wealth creation but I’ll tell you they’re wrong. At the same time I’ll say that real estate has been a great success for me. That sounds schizophrenic but the reality is that for real estate to generate income it takes work and smart decisions, there is no easy way and while some people will have great success with real estate others will struggle or lose everything.

As promised this post is a followup to some of the numbers in my post titled Manage Your Money Don’t Let it Manage You. Specifically I said that, in 2013, dividends and interest accounted for 14.75% of my gross income. That’s a high number, imagine making an extra 14.75% of what you make right now – it would be nice, right? Well this does vary year by year and here how’s its gone for me: 2007 – 12.59%, 2008 – 7.08%, 2009 – 3.45%, 2010 – 5.57%, 2011 – 10.15%, 2012 – 9.68%.

Passive income indeed but it is highly variable and you can see that the recession years had very low numbers that reached a low in 2009 and have been (mostly) growing since. I expect 2014 to be lower than 2013 because I don’t expect the stock market to do as well (Update: I was wrong. 2014 saw dividends and interest at 18.67%). Let’s also not forget that you may owe taxes on those dividends and if you reinvest those dividends (which you should) you’ll have to come up with that money yourself. I say may owe taxes on the dividends because it’s only true if the stocks, bonds, mutual funds, or ETFs that generate the dividends are in taxable accounts. Most of our dividends come from our retirement accounts, 401k and IRA.

Over the years I’ve read a lot of self help books especially with a financial bent but most weren’t very helpful which is why I wrote my own. One book, however, stuck with me. It’s called Your Money or Your Life and puts forth the concept of passive income through dividends and interest eventually replacing your salary allowing you to retire. But it takes a while and requires aggressive savings. I liked the idea so much that it is a major part of my retirement plan but as you can see, even with my aggressive savings, I’ve got a long way to go.

Now to real estate. In the same post I referenced above I pointed out that my rental properties represent 6.11% of my income but they also account for 9.09% of my expenses. In other words I’m losing money on the real estate. Not to mention the time I devote to overseeing and renovating those properties. Anyone who has rental real estate knows the income is anything but passive, it takes a lot of work. But there are several things going for me: first, I get to use those properties while I’m there to oversee and renovate them (they’re vacation rental properties and so are a literal pleasure to visit), second  I will be able to deduct the money spent on renovations, repairs, and improvements when I sell the property (income limits called passive income rules prevent me from doing so now), and third, and maybe most important is that the properties have increased in value over the years and I’ll be able to sell them for more than I paid. Like any investment these are long term commitments.

When people start talking about passive income like it’s easy, come back here and read this for a little balance.

Do you have experience (good or bad) with passive income? Add your comments below!

 


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Manage Your Money Don’t Let it Manage You

 
So I haven’t written anything in a very long time and I’ll get around to some reasons in future posts but yesterday I saw a sudden rush (which for me means three or four people) reading some posts I wrote a while back, they even tweeted links to their followers (thanks!). That inspired me to make an effort to write some more so I’ll start again with a favorite topic of mine, finances.

Percentage_IncreaseI keep very detailed stats on my money, what’s coming in and what’s going out, my investments, how they’re performing, and my plans for the future. One thing I do every year is a cash flow analysis (because I’m that exciting). Because I track everything I spend I can make informed decisions rather than just guessing. Of course I’m not going to share actual numbers – you know my name after all, but I will share percentages.

All of my income is 100% but what is the total from? Well my salary represents 35.92% and my wife’s salary represents 41.91%. Yes she makes more than me and I’m not only ok with it, I love it because it shows that smarter people are rewarded more. So our salaries represent 77.20% of our income where does the rest come from? The next largest chunk comes from investments in the form of dividends and interest at 14.75%. This might sound high and it is (and will be the subject of a future post) but is key to building wealth. I wrote about our two rental properties in What Next and they represent 6.11% of our income. After that comes our 401k match which represents 1.87% of our income and that is free money, money that we’re not taxed on but that grows and grows until we retire (and beyond). The importance of the match can’t be overstated.

Now comes the importance of tracking your spending because I can list, in broad categories, where every penny of my money went.

Mortgage: 12.67%  Loans: 2.22%  Insurance: 1.78%  Taxes: 19.59%  Commuting: 1.59%  Household: 1.57%  Vehicles: 4.19%  Eating Out: 2.67%  Groceries: 0.80%  Entertainment: 2.01%  Utilities: 1.79%  Travel: 0.72%  Medical: 0.38%  Pets: 0.49%  Rental Properties: 9.09%  New Business: 17.57%  Misc: 2.64%.

Since the numbers above don’t equal 100% where did the rest go? Savings! Last year we saved 18.23% and that’s from gross income while in the midst of opening a new business.

Some observations:

While my rental properties contribute 6.11% of my income it takes 9.09% in expenses. In other words “passive” income like this isn’t easy money and often the return isn’t evident until the property is sold.

Even though a large amount of money is generated by dividends and interest (this year, 2013, was unique because of how much stocks were up) most of that money is inaccessable because it’s in retirement accounts such as a 401k.

We spend very little on groceries for two reasons: we eat out a lot and we buy in bulk at Costco which if done carefully can save us a lot.

 


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Home, Investment, or Both

 

I’ve heard it said that your primary home, the place you live, is not an investment but I disagree. I have been very clear that it is not an ATM, a source of cash to be used to finance an unsustainable lifestyle but I do believe it’s an investment. I know I’ll get strong opinions on this from a lot of people but first let me explain.

When people hear the word investment they often think of stocks, bonds, mutual funds, or business ventures but there is a lot more that you can invest in including intangibles. You can invest in time, spending time with family and friends. You can invest in yourself by exercising and taking care of yourself. You can invest in knowledge by being curious and always learning.

When it comes to your home it is an investment in stability, in yourself, in a better future. Handled recklessly buying a home can lead to disaster. Handled properly, like other investments it can provide decent returns. How? Let’s start with a simple example.

Assume you’re 25 years old and are buying your first home. You spend what you can afford and put a proper 20% down payment (crazy right? – it shouldn’t be) on a $100,000 home (keeping the math simple here). You would have liked to buy a bigger $200,000 home but simply couldn’t afford it. Ten years later, assuming “normal” appreciation of 3% per year you sell your home for $135,000 the equity you’ve built up plus your other savings and investments allows you to purchase a $200,000 home.

ToolbeltNow let’s look at two other options. First, you’re a handy person and over the years you make improvements to the house at considerably less cost than if you had hired people to do the work. When you sell the home in ten years it commands more than the “normal” price increase and you sell it for $150,000. Now combined with your other savings and investments you can afford to buy a $250,000 home. Second, let’s assume that you paid extra toward principle each month and were able to build even more equity. When you sell in ten years at $150,000 you can now afford a $300,000 home.

The term investment doesn’t mean you’re going to get rich or that you’re even going to get a positive return, any investment has risk and that goes for housing as well – I think we all know that now.Home Values Chart

People who say it’s better to rent point out facts such as you’re not paying property taxes and insurance but the fact is you are. As a landlord I make sure your rent covers my expenses which include property taxes and insurance. When you leave the rental you have no equity to show for it.

To me a home is a great investment because it serves two purposes; the first is as a place to live and the second is as an asset that gives you more options in the future. Used properly a home is indeed an investment just not a get rich quick scheme.


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Are You Crazy???

 
StraightjacketI’ve heard it said that the definition of insanity is doing the same thing twice and expecting a different outcome. I can add to that. My definition of insanity is knowing you’re on a road to nowhere and staying there. That is what 60% of US workers are doing. These are people who are not asking what next, who aren’t willing to take simple steps to secure their future.

I wish it were possible for you to hear me scream in a blog post. START TAKING RESPONSIBILITY FOR YOUR FUTURE. Apparently people are much too concerned with the present to think about the future. My post yesterday was about taking opportunity when it’s available but maybe you need me to be a little clearer. You’re an idiot. That’s right I just called you an idiot and, like the classy Governor of NJ, I’m standing by my statement.

Why am I so angry? A new report from the Employee Benefit Research Institute (EBRI) states that 60% of US workers have less than $25,000 in savings and investments. People talk about welfare recipients like they’re a drain on society, well wait till the fools who only have $25,000 saved toward retirement get too old to work!

Success comes when you take action now for a benefit in the future, but according to the study, “instead of saying I’m going to save more today, they just say I’m going to defer my retirement age once I get to 65.” Are you kidding me? Yeah, that’s a great plan, right up there with playing the lottery or praying for a million dollars.Lottery Ticket

The other number that is pathetic is that only 14% of the people surveyed feel very certain that they will have enough to live comfortably in retirement. But apparently 100% aren’t willing to do a damn thing about it. There is no way to escape the fact that you are the only one responsible for your future. 

The survey does not include the value of a person’s home – which is a good thing since a lot of these people, even so called experts, probably used their homes as ATMs contributing to the housing collapse. The other thing the survey doesn’t include is the value of any traditional pension plans the respondents may have. I say “may have” because most don’t know if they do. Although 56% expect to get a pension only 33% say they have one! Was I being to harsh with the name calling?

I do not include my pension or social security in my projections for retirement. If I’m not comfortable without that money then I’m not saving enough – boy am I in the minority here! According to the St. Louis Fed the personal savings rate for 2012 is 4.6% but compare that to my personal savings rate for 2011 of, brace yourself, 32%.

I’ll admit it’s easier to get the savings rate up when your basic necessities are met but it goes far beyond that. I could easily afford an iPhone or iPad or both but I didn’t buy those because they are not a necessity. I could have an HDTV in my bedroom but I rarely watch television there and that would increase the cost of my Direct TV service. These are the choices we make in order to get up to that high savings rate and it is the reason we are so far off the charts in our savings and investments and why we have so many options.

Are you asking what next or are you coasting? With the steep incline of retirement looming, coasting won’t take you very far. What are you doing to plan for the future?

 


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Opportunity and Action

 
Success is not easy, it takes work. Success comes at the intersection of opportunity and action. Opportunity and ActionThere are a lot of people who were at the right place at the right time but didn’t take action, they let the opportunity slip through their fingers. The sad part is that many people may not even realize it.

The first step to success is recognizing potential.

When I was planning to make the transition into financial planning as a career I volunteered to speak and answer questions at informational sessions for National Guard troops and their families that were being deployed overseas. While these men and women, both the soldiers and their families, were sacrificing for their country, they were also being offered unique benefits. (Not that they were enough compensation but at least it was something).

Soldier in DesertOne benefit was that the soldier’s income while overseas was tax free. Even better than that is the fact that they could also contribute to a Roth IRA – that was huge. Why? Because normally Roth IRA contributions are after tax, meaning you pay tax before contributing. When you withdraw the money in retirement it is not taxed so you get the benefit of tax free growth. What these soldiers were being offered was an opportunity to invest money and have it grow without ever, let me repeat, ever, paying taxes.

I was standing at the back of the room when my colleague was making this presentation. A soldier and his wife were standing next to me and the wife pointed out this unusual and generous benefit. “I don’t care about that,” the soldier said. He was in the right place at the right time but unless he acted on that information, the opportunity would be lost. I wonder how many of the people we owe so much took advantage of that benefit.

Taking action is the second component of success.

The other aspect of success is that once you recognize an opportunity, you have to be willing to sacrifice to get the benefit. The soldiers aren’t paid well for their service and diverting $4,000 (the maximum at the time) into a Roth IRA could be a hardship. If they looked far enough into the future, however, they would have seen the benefit of this action but I suspect that many did not.

Are you open to opportunities? Are you constantly on the lookout? Would you be willing to sacrifice, now, for a benefit that is years in the future? Then why aren’t you?

 


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A Crisis Isn’t A Crisis For Everyone

 

I read the news today, oh boy!

“Housing Crisis to End in 2012” the headline said. But my question to you is what housing crisis?

I’m not being stupid, I didn’t just crawl out from under a rock, and I didn’t have my head in the sand.

Actually here's my wife under a rock!

A crisis is only a crisis for those affected, for everyone else it’s not. My home lost value as did my rental properties, significant value compared to the overinflated heights of 2006, but is that a crisis? If I had to sell, maybe, but only if I owed more than the mortgage.

There is no doubt that a lot of people were very badly impacted by the housing market, were taken advantage of, made really bad decisions, had bad luck, or a combination of all of those. I’m not going to try to assign blame on a macro level, each situation is different.

Whether the housing crisis was or wasn’t a crisis for you, there are lessons to be learned, lessons in what next.

In yesterday’s post I wrote that there are consequences to every decision and that a What Next approach takes a long term view. That’s why financial planners suggest an emergency fund, liquid savings that can be accessed to pay your expenses in case of, well, an emergency.

BE CONSERVATIVE

The lesson from the housing crisis whether you emerged unscathed or not, is to be a little (or a lot) more conservative in your estimates. If buying a home is out of reach without serious stretching then delay the purchase.

The reality inherent in any major purchase is that you will have to give up one thing to achieve something else. Sometimes in order to afford the house you want, you’ll have to save more aggressively and that might mean foregoing that new car, or the boat you really want but can’t really afford, or the lifestyle that looks good but comes with a steep price.

HAVE A GOOD REASON

The second lesson from the housing crisis is to make decisions for the right reason. A house is a place to live, not a piggy bank and not a lottery ticket. Buy a home to live in. Having a good reason goes for other “assets” like a business, too. I’m on another journey, another scheme my wife calls it, to open a franchised business. She is asking the exact right questions; “for what purpose? How will we benefit and is the trade-off for that benefit worth it?”

STICK WITH YOUR PLAN

I have to admit that I don’t have compelling answers to those questions. We have a plan in place and we’re sticking with it. Sure, it can evolve, but it doesn’t have to. A lot of people got distracted by the ever increasing home prices and altered their plans. Not a smart move without a compelling reason. And prices keep going up isn’t a compelling reason.

LIVE BELOW YOUR MEANS

This really encompasses all of the previous lessons because if you are a little more conservative, wait until there is a good reason before making a move, and stick with your plan, you won’t be impulsive. A lack of discipline in spending is what leads a lot of people to live beyond their means. Living below your means is not a bad thing, it’s not a sacrifice, it’s really what everyone should be doing because it means you’re saving. If you live at your means that indicates to me that you aren’t saving any money.

It’s a shame that it took a crisis for people to learn these lessons, I just hope they stick this time.


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