Aug 20, 2015

Principle 3: Tough Love...Pay Cash

The amount of damage paying interest to a bank can do to any solid financial plan is devastating.  I sit with folks everyday that have way to much debt already, and for some reason are considering more.  The best advice I can give you is to PAY CASH FOR EVERYTHING. Period.  Below is a little bit of tough love, and additional details for your to reflect on.

Exceptions to Paying Cash

Though exceptions like a house and an education exist, it is nearly always best to save up the appropriate amount of cash to make a purchase versus using a loan.  This may seem like common sense or even laughably simple to some of you, but I have a feeling someone out there needs to hear this.

In the rare borrowing exceptions like buying a home, be conservative with your mortgage.  Put a minimum of 20% down and borrow no more than 2 times your annual income with a 15 year fixed rate mortgage (30 if you must).  Aim for payments to be no more than 1/4 of your take home pay.

Buying a bigger home isn't an investment, its a lifestyle choice and a very expensive one at that.  As soon as possible, set up an automatic additional "principal only" payment through your mortgage company, and watch your net worth explode and your remaining balance disappear.  Having a paid off home is a wonderful feeling, not to mention the deep sleep you'll begin to feel once you own your home "free and clear!" Pay cash.  *Optional-stick your last mortgage bill to the fridge with a big PAID stamp on it.

Steer Clear of Home Equity Loans and Lines

Pay for improvements with cash and find a way to look the other way when you see shiny new toys.  One of the biggest reasons we experienced the credit crunch and global financial meltdown was because people looked at their homes as ATM machines and pulled out all of the equity to do projects or buy new things.  Fight the urge.  Pay cash.

College and Education

Urge your kids to pick an "in-state" school or a less expensive school known for the program or subject they are interested in.  The name brand is not nearly as important as what they learn while at school.  Hopefully you funded a 529 plan while they were growing up.  Pay cash.

Buying a Car

Get a reliable 2-4 year old car with high gas mileage and solid consumer reviews.  Look up the suggested retail on Kelly Blue Book and try to find a gem on either Autotrader, Craigslist, or the like.  Taking a look at some local dealerships with attractive warrantees is a great place to start as well.  See my in-depth guide to car buying herePay cash.

In General

Avoid revolving debt or monthly payments like the plague.  Consumer debt is no good, and if you are wondering if you should take out a loan to buy something I already have the answer for you and it's easy. It's no.  Pay cash, live within your means and get back in the game!

With love,

TB (Pay cash).
Take Me to Principle 4:

Jul 29, 2015

Principle 2: Why High Monthly Overhead is Crushing Your Investing Goals

My Wife and I have a few high-value items that we can not live without.  She likes her I-Phone and I like my gym membership.  We both like having cable TV, and we do not plan on selling one of our cars any time soon.  But we both know there are areas in our budget we could cut back or eliminate and apply the saved monthly payments to mortgage reduction or retirement savings.

How about you?  Can you think of any monthly overhead expenses, particularly recurring monthly expenses like subscriptions, fitness clubs you don't use, or any expense that gives you minimal value in relation to its cost?

A few that stick out in my mind that you may want to look at are the following:

1. X BOX Live Membership-These can be up to $10/month.
2. Expensive Yoga Studios-I know classes can cost $25 or more EACH.
3. Magazine and Online Content Subscriptions-Do you read them anymore?
4. High Cost Cell Phone Plans-My wife likes her I-Phone, but are you getting the best deal?  (Hint: Check out Straight Talk Wireless-$30 to $45/month)
5. Unnecessary Insurance Premiums-Boat, Motorcycle, or any other kind of "nice to have" item that requires monthly insurance
6. Netflix/Hulu Subscriptions-These seem like a good value, but do you need both?  Can you get away with cancelling these?
7. Home Security Systems

A few non-recurring expenses you may also want to look at are:

8. Dining Out-This is likely the biggest budget buster out there.  Track this for 3 months and you may be surprised.
9. Clothes-Trips to the shopping mall can add up to BIG annual totals spent on clothes.  How about Ross?

What I'm trying to get at by sharing some examples with you is discretionary expenses need to be audited closely.  These can escalate quickly, and attention should be placed particularly on recurring expenses (auto-debited from checking/credit card, monthly bills by mail).

What about premium cable?  Do you really need Direct TV or 25 premium channels?  Does your cell phone plan call for Unlimited Talk/Text/Data at a low cost of $200!!!  Eliminate or scale these back now to get more value for your money.

Need some motivation?  Google "time value of money" and find out exactly what those monthly bills end up costing you over a, say, 10 year period.  Here's an example:

$100/month Jiu-Jitsu Academy Membership

10 Year Cost assuming opportunity cost of 6% growth: $37,387.

In other words, if you chose to instead invest that $100 membership fee in a low cost index fund at Vanguard earning 6%/year, you would have a total of $37,387.  Pretty expensive membership, huh?

Again, I'm not saying you turn into the guy on the internet eating peanut butter and jelly sandwhiches all day to retire at 30 with annual expenses of $25,000.  I am saying, however, that these monthly expenses can really cost you in the long run and it would benefit you greatly to honestly assess the value they bring you and your family.

Until next time,

TB
Take Me to Principle 3:

Jul 23, 2015

Principle 1: How to Get Out of Debt

One of the most difficult conversations I have with my clients usually involves how to get out of debt.

Let's look at an example.

Jane Doe owns a home, and a friend recommended she speak to me.  Her daughter was getting married, and she didn't know what to do.  She had over $20,000 in credit card debit and figured she could tap her home for the last bit of equity in it, and use the funds for her daughters wedding.  I know what you're thinking... she's a spendaholic. 

Actually, she's not.  She got married young to a deadbeat Dad who hasn't paid child support in over 15 years.  She raised her two daughters alone as a single parent in an incredibly high cost of living area.  Not to mention, she did all of this on a teacher's salary. 

Between 5 credit card bills, her mortgage, and the essentials, she had less than $50 of disposable income.  I really wanted to help her, possibly by consolidating her high interest credit cards into a low interest Home Equity Line of Credit, but her debt-to-income ratio was too high.

With tears quickly building in her eyes, I scrambled to calm her down.  "I'd like to help you." I said.  "Will you listen to everything I say and do your best to stick to a plan I give you?  I will be calling you once a week to discuss your progress, and would like your full commitment prior getting started."

"Yes!" She exclaimed. 

So I began reviewing her finances, and remembered a Dave Ramsey theory that getting out of debt is 20% head knowledge, and 80% behavior.  I know conventional wisdom tells us to pay off higher interest credit first, but what about getting some MOMENTUM!  I firmly believe his snowball tactic is a good one, and will recommend it to my readers as well.

So here's what you do:

1. List all of your (non-home) debt on a piece of paper in order from smallest balance owed to largest.
2. Pay the monthly minimum on all debt until you have $1000 in an emergency savings account.  Do not touch this.
3. Pay the minimum on all debt besides your smallest balance.  Pay the maximum you can afford on this, and do so with "gazelle-like" intensity as Dave Ramsey would say.
4. Do your best to keep expenses low.  Ramen isn't healthy, so I don't recommend it, but Costco and sandwiches will feed you very inexpensively.  I'd suggest you try that.
5. Once you pay off one of your credit card balances or loans, save the last statement and display it somewhere you'll see it everyday.  I can't say enough about the positive impact the feeling of "making progess" can have on a plan to eliminate debt.
6. Take the same payment (+minimum from next largest liability) and apply it to the next largest balance.
7. Continue this process (and be sure to display the paid off loan balances on your fridge or bathroom mirror) until all balances are paid off.
8. Take a sigh of relief and pat yourself on the back.  You did it!

It is very easy to feel discouraged when you are up to your ears in debt.  I truly sympathize for clients like Jane Doe, even more so because she got there in large part by doing her best to provide for her children in less than ideal circumstances. 

Getting out of debt is a concious decision.  It must involve a lifestyle change. 

I applaud you for reading this article if your circumstances are similar to Jane's, and thank you for sharing with friends in debt if you feel this would be helpful to them.  Please leave a comment if you have any questions!

Regards,

TB
Take Me to Principle 2:

Jul 8, 2015

Principle 5: How to Automate Your Personal Finances

*Credit: Ramit Sethi at I Will Teach You to Be Rich
One of the most important topics I studied in business school was system creation.  From your local Mom and Pop, to Fortune 500 companies, businesses all share the need to develop systems that lead to success.

My advice to readers would be to establish an automated system to assure lasting wealth creation.  No matter your income stream, a clearly defined process for the money flow in your wallet can take the short-term struggles and temptations out of saving and investing.

Let's assume you get paid twice monthly.  I don't want to lose any entrepreneurs that have irregular income streams, so this will work for you as well.

You'll need:

-401k (nearly a must have, but not quite)
-ROTH IRA (Vanguard is best company to open this account with)
-Checking account with bill pay feature (preferably free of any monthly service fees)
-Savings account with sub account options (Best option here is Capital One "360", formerly known as ING Direct.
-Credit Card

Step One

Contact your HR department and request a predetermined percentage of your paycheck be "auto-deducted" into your company's 401k plan.  Ideally, your company offers a match of your contributions.  If your company matches 3% of your salary, select 3% for now.  We'll return to this in a moment to see if increasing this further makes sense.

Step Two

Establish a direct deposit of your paycheck into your checking account.  No one has time to deposit checks at the bank anymore, so save yourself the bi-monthly trip.

Step Three

Determine your monthly expenses.  An incredibly important piece of any sound financial plan is an emergency savings account with 6 months of expenses available in case of job loss, medical emergency, family emergency, car repairs, etc.  This account should not be touched unless its an extreme emergency.  So if you spend (not including investments) $3000/month, your emergency fund should have $18,000.

Next, set up sub savings accounts for your various short term savings needs.  Some needs that come to mind are:

-Home Down Payment
-Wedding
-Car Replacement
-Vacation

Capital One will allow you to set up an auto-deposit from your checking account into each of the sub savings accounts.  A number that sticks out in my head is 5% of gross income, but each person's financial picture is different.

Step Four

Contact your ROTH IRA company, and set a fixed monthly auto-investment amount in line with your current income and expense levels.  The 2013 monthly maximum is $458.33/person.  If you are married, this figure would be $916.66.  The ultimate goal would be to max this out, and if any room were left in your budget, put the remainder in your 401k up to a monthly amount of $1458.33, the monthly max for 401k contributions.

Step Four

Set any recurring monthly bills (cable, phone, gym membership, netflix) to be auto billed to your credit card number.  This way you will earn miles/cashback rewards on these purchases, which will really add up over time.  All other spending, such as groceries, gas, restaurants, etc. should also be paid for with credit card.

Pay off your credit card in full at the end of each month.  The best way to do this is to set up an email notification for the 30/31st of each month, and use this to review all purchases and pay off full balance.

I can't stress enough the importance of paying your card off in full.  More on this in later posts.

Step Five

In the rare instances where a credit card cannot be used to pay a bill, use your bank's "e-bill pay" feature, where an electronic check is sent to an address you specify.  This can be automated as well to assure important obligations like rent are not missed.

For "cash only" businesses and miscellaneous spending that isn't supported by bill-pay or credit cards, ATM withdrawals will take care of the rest.

And there you have it!  The above guide will position you to "set it and forget it" when it comes to your personal finances.  The only goal you should have once this system is in place is to be committed to increasing your savings rate over time.  Your ability to control spending will make or break your long-term success, so do your best to eventually get your savings rate to 30% of your gross income (before taxes).

BUT DON'T FORGET TO HAVE FUN TOO!  NOBODY LIKES A MISER!

Warm regards,

TB
 Take Me to Principle 6:

Jan 7, 2015

How I Saved $105/month On Family Cell Phones...AND Upgraded from a Flip Phone!

So we all know Verizon is expensive.

"Yeah, but... they have great coverage... no dropped calls!!!"

Blah, blah, blah.  They also have costed me over $1270/year in excess cell phone bills for over five years now.

My wife and I have been with Verizon for over five years, and I've been using a "dumb" flip phone, while she had an IPhone.  Our monthly bill for this has been a whopping $142.74/month, and I finally had enough.  With a baby on the way, I decided its time to get real with reducing our monthly expenses.

With help from the Mr. Money Mustache family, I discovered great service providers like Ting, and Republic Wireless which feature affordable "pay as you go" plans which use major networks such as Sprint and AT&T.

The bottom line is I chose to go with Ting, and couldn't be happier.  My bill has now been reduced from $142.74/month to $37.50/month.  That's BIG savings.  Like many cheaper pay as you go companies, you do have to buy your own phone, but with Ting this was a piece of cake.  I purchased a used IPhone 4 for $88, and the rest is history.  For many of you, you may be concerned about the ETF or early termination fee of the dreaded Big V, AT&T or Sprint networks.  Guess what?  I paid it.

My contract wasn't up until November 2015 (Its now January 2015), but the math proved the $110 fee was an easy choice to make.  My wife's plan was already out of contract, so I politely paid my fee and moved on with my life.  If I waited until November to break away from Verizon it would have costed me an additional $942.40 after accounting for the early termination fee.

Ok, so what's the deal with Ting you ask?  Simple.  Take a look at the pay as you go chart below:


So that's the skinny on how I saved $105.24/month for our family.  Is this something that you should consider?  Coverage on Sprint networks is GREAT, and am so glad to be out of that expensive two year revolving contract with Verizon.  You might be concerned with DATA usage, but we weren't.  I have WIFI nearly everywhere I frequent, so I was happy to give up the whopping 2 Gigabytes of Data we had through Verizon (which we used less than 100 MB's of), and trade it in for a pay as you go plan featuring nice savings. 

Jump on the Ting train people!!!

TB Out.

Mar 1, 2014

Guide to Getting Rid of Car Payments Forever!

From time to time, I hear friends and clients complain about bone-crunching car payments.  I'm talking multiple-$500+dollar-payments-that-suck-the-life-right-out-of-you payments.  I notice the grimace in their face as they talk about how it's tough to "keep up" and just wish they could go away for good.

But what if I told you they could?  What if instead taking out a loan ever time you need to buy a car, we put into action a proven plan used by millions of successful Americans to avoid car payments all together?

It goes a little like this.  Depending on where you are in this merry-go-round, skip ahead as needed.

A few simple ground rules first:

1. Never lease a car.  Ever.
2. Sacrifice now so that you can drive a nice, payment-free car later.
3. Don't be lazy.  I know you want a nice car now, but you're going to need to wait for it.

Now that the fundamentals are out of the way, let's assume you just moved to a new town with very little money in your bank account.   You've been offered a job, but you'll need a way to get to and from work, so you begin your search for a vehicle.

I'm going to assume that most of you know not to purchase a NEW car, but to be clear... do NOT buy a new car.  Ever.

There, I said it.

A new car loses approximately 40% of it's value in the 1st four years.  Why not let someone else take that hit?

But if our assumption above that you have little money in your bank account is true, we're going to need to start at the very beginning.  Yes, we're going to buy a "beater" car.

In America, the average car payment is approximately $400.  Because you have little money in your bank account, however, I'm going to assume you can only afford a car payment of $250.  What we're going to do now will be quite contrary to general wisdom, but is probably the most important step in this "payment free" program.

Take the $250 payment and "pay yourself" by setting up a separate checking or savings account at your local bank and creating an "automatic transfer" of $250/month for 4 months until you have $1000.

Now go buy a $1000 used Car.
...

I know, a $1000 car is a PIECE OF CRAP.  But don't worry, you won't be driving it very long.  Let's say you drive this car for one year, during which time you pay a total of $1000 in car repairs to keep the thing running.  During the year, you also continue saving $250 a month.  After 12 months, you would be left with $3000 saved minus $1000 in repairs plus a car valued at $800.  Go ahead and sell your "crap car," and you are left with $2800.  Not bad for one year!

So now you check around and find a clunker for $2800, slightly better than your first car.  While continuing to save your $250/month, you manage to drive this car for an additional year with total repairs costing $800, and a sale price on the car after 12 months of a healthy $2300.

The result: $3000 saved, $800 spent on car repairs, and a $2300 sale price, or $3000 - $800 + $2300 = $4500.

Pretty sweet right?

Ok, since we now have $4,500 we can afford to "step it up" a bit and buy a nicer car that we'll drive for two years now.  After two years, you're left with $6000 saved up, $1400 in car repairs, and a sale price after 24 months of $3000.  You know the drill:

$6000-$1400+$3000=$7600!

Ecstatic with your progress, you go out and buy a dandy little ride for $7600 and drive it for three years.  The $250/month savings over those three years will have added up to $9000, with $2000 in car repairs, and a sales price of $5000.  $9000-$2000+$5000=$12,000.

You now have the means to pay cash for a $12,000 used car.  This same car two years ago was new, you just let someone else take the hit when it was driven off the lot and you have no payments!  Excited?  You should be!  Especially knowing you achieved all this in only seven years.  Do you know how long most car loans take to get paid off?  

Normally, you would be trading in the car you bought new, rolling the balance into another loan, and buying another new car on which you make another seven year's worth of payments; or worse, be making lease payments all of that time.  But not now.  You are now driving a two year old car and have no car payment at all!  All you do now is drive that car as long as you wish while you keep saving up that $250 per month.  You are now at the point where you could, if you wanted to, go out and buy a two year old car every three years and never have a car payment! 

It's Your Choice

At this point you need to realize that this was all figured with just a $250 per month car payment.  What if you could afford $350/month, or even a $450/month?  What if you were willing to drive that 'crap car' an extra year?  Instead of taking seven years to be paying cash for two year old cars, you could do it in three or four years.  See, if you were willing to sacrifice for three to seven years, you would never have another car payment for the rest of your life and be buying cars that are only two years old.  Plus, you could be buying another car every three years.  Or, you could instead continue to buy or lease new cars, take the big hit in depreciation, have car payments the rest of your life, never be out of debt, never have financial peace-of-mind and always be broke.  Yes, people may laugh at your 'crap car' for a few years, but they won't be laughing when you never have to drive a car that's more than three years old again, and you never have another car payment.  It takes time and effort.  It takes sacrifice and determination.  It's not easy at first; but, it is most certainly worth it! 

Is it hard to discipline yourself to start buying cars this way?  Absolutely.  Is it easy to stick with it?  Nope.  It takes discipline, and a lot of sacrifice--and that's why most people will never do it the way I just taught you.  That's why most people will be broke, financially stressed and making car payments for the rest of their lives!

The method for buying cars I just showed you is how many millionaires do it.  In fact, statistics show that most millionaires buy cars that are at least two years old.  This is one of the things they've done to help them become wealthy in the first place.  Now you know.  As always, the choice is yours:  have payments and debt for the rest of your life, or use what you've learned here to take another huge step toward becoming wealthy.

Feb 22, 2014

How to Retire Early


How to retire early

This isn’t a post on how to accumulate massive amounts of wealth, or to assist with identifying what types of careers or business ventures will allow you to retire well ahead of the commonly accepted “Full Retirement Age” of 65-67.

This is an overview and “food for though” for the individual interested in discovering how to leave their job or business for good to live off their accrued investments for a period of more than 30 years.

An Example

Bert is 47 years old with a wife, and 2 children beginning college this year.  Thanks to a successful career in his 20s and 30s, and a business he sold last year, he has accrued $3,500,000 in a mix of taxable and tax-advantaged retirement accounts held at Vanguard.

Bert would like to consider himself “financially independent” and he and his wife are considering using the “R” word as their newest profession.

(The “R” word is Retired… if you haven’t had your coffee yet).

So… what do you think?

Well, if you’re anything like me, at first glance I think they are good to go.  But lets take a closer look at how they might go about solving this desirable problem.  After all, how many lottery winners lose their fortunes within a few years of winning it!

How long will your retirement be?

We never know when we'll die, but in my financial modeling... the age of 95 looks like a pretty conservative figure to use for our example. 

Assuming either Bert or his Wife live to the ripe old age of 95, that leaves 48 years that they'll need to survive on this nest egg!

Down the line, social security will likely help a bit, but Bert has decided to view SS as more of the "icing on the cake" and will focus instead on his investment portfolio as the primary source of future income.

Enter the Trinity Study

"One scenario backtested in the Trinity study suggests that a retiree with a suitably allocated $1 million portfolio could withdraw $40,000 the first year, give herself a cost-of-living adjustment every year afterwards, and have a 98% chance of the portfolio lasting at least 30 years."

This sentence pretty much sums up one of the most commonly referenced studies of the rate at which retirees should withdraw from their retirement accounts to assure it lasts the standard 30 year retirement window. (Age 65 to 96).

But remember the name of our post?

How to retire, EARLY.

So Bert and Co. have a time horizon of 48 years.  What % of their portfolio can they withdraw each year, and can they adjust for inflation?

It seems that the consensus among forum members over at bogleheads.org, (one of the most widely read and followed investing forums on Earth) is that a withdrawal rate of 2-2.5% should be used for perpetual withdrawals.

For example, if the Rockefeller family creates a charitable trust with $100,000,000, in order to preserve principle and keep up with inflation, these funds should be invested in some form of a 25 to 75% equity allocation, and the annual withdrawal should not exceed 2%, adjusted upward each year at the rate of inflation.  This would (hopefully) ensure that annual gift giving could continue far into the future.

Since Bert and his family have a time horizon of 48 years, hardly FOREVER, it would be a logical assumption that a 2.5% withdrawal rate on $3.5 Million ($87,500) adjusted for inflation would result in a high success rate.

(By the way, one method of adjusting for inflation is to find out how much social security payouts increased each year and increase your withdrawals by this %).

Is It Enough?

How did Bert arrive at this healthy portfolio balance?  Well, a successful career in his 20s and 30s, as well as the sale of his business was the primary source of the wealth he's accumulated.  Do you think $87,500 adjusted each year for inflation would support his family's lifestyle? 

I'd assume so, but what if he didn't save a high percentage of his income?  Or what if his annual expenses were $150,000 throughout his adult years?  Would his family be able to retire and keep their current lifestyle?

Herein lies the question.  If Burt ended up with $3,500,000, he either made a high income, was a very disciplined saver, inherited it, or a combination of the three.  I can almost assure you that the average family earning the median US income will not reach this figure by age 47.

The Allocation Variable

The Trinity Study also took into account the overall mix of an investor's portfolio, and how it may effect success rates.  The short version is, investors in their 50's and 60's should consider having between 40 and 60% of their portfolio in equities (the rest in bonds) to retain buying power.  Here's my asset allocation plan, you're welcome to use this as a starting point:

Stay the Course:
Age..........Ratio

25-50........80 stocks/20bonds

51-65........65/35

60-75........50/50

over 75.....35/65.
(Equities divided 70/30 between Domestic and International)
60-65 year old would be in the 65/35 if still working, in the 50/50 if not.
Please refer to the 3 fund portfolio for more information on my allocation.

Takeaways

Now that you have a grasp of what it takes to retire early, do you think you have what it takes?  A retirement age of 60 to 65 may very well allow a safe-withdrawal-rate of 4%.  If you've accumulated $1,000,000 by age 65, this would leave you with $40,000/year.  But if you choose to retire in your 40s or 50s, this may only support an income of $25,000/year.

I hope you have a better understand of what you'll need to do to retire early if that is your desire, be it by increase your savings rate, or MAKING MORE MONEY.  Whatever the case, it would be wise to aspire to have fun along the way, and do you best to not run out of money in your golden years.

With a heart full of love,

TB