Question Everything

I don’t mean to speak for anyone but I’d like to think that we work hard for our money and we would like to keep it. That’s why I discussed fraudulent investments earlier and some of their tell-tale signs to help you recognize and avoid them. But people can be really crafty when it’s time to con you out of some cash.

If the proposed investment initially passes the smell test, here are three questions you can ask to further pull back some layers and determine the merits of the deal:

Does the dealer have a license? Even with the best of intention, the market has shown that it cannot be trusted to regulate itself. The best way of ensuring that people and organizations are doing the right thing is to have the threat of severe penalties (usually financial) hanging over their head. Unlicensed advisers are illegal and accountable to no one. Furthermore, we do not know what their qualifications are.

Does the risk/reward structure make sense? “High risk, high reward” is a common cliche, but it is true. If someone is offering a low risk guaranteed investment, the returns will likely be very low. The opposite applies if the rewards are significant. The risk is likely to be high and the returns will not be guaranteed. Anything different is likely a scam, or at best it is misrepresented.

Is the investment registered? It is similar to an unlicensed dealer. Who is tracking and regulating the security if it is unregistered? Personally, I do not like to rely on a company that is financially invested in me being uninformed for the truth. Registering a security ensures that the SEC, an independent government organization will ensure transparency by providing you with the necessary information to make good choices.

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Introduction to Investing

Investing

I often talk about the importance of financial independence; at least to me. However you can’t achieve that through working only. Your earning potential is limited as a wage earner and only the most exceptional and/or connected will ever get to a salary level where their earnings alone will make them independently wealthy. So the rest of us turn to investments.

The approach that I take to investment is to look at every dollar I have as an employee. They are supposed to work and be productive. If they aren’t working they are costing me and I need to find an activity for them. But the drawback is finding the right “work site”. I believe that diversification is extremely important. Some of my dollars are doing heavy lifting in the real estate market, some are doing lazy work in CDs and savings and others are doing risky work in the stock market. That is my way of diversifying.

Diversification is an old and basic investment concept. It is a tool used to spread out your risk to ensure that you don’t have all your eggs in one basket. In my case, I use real estate as a mechanism to provide me with guaranteed cash flow since people will always need a place to live. I use my CD and savings accounts to provide me with flexibility and liquidity. Meanwhile, I use my stock market investments as a tax tool since they are work sponsored retirement plans.

My husband finds humor in me saying that investing is fun. But the truth is, the fun doesn’t stem from the process of learning to navigate the market or feeling my stomach drop every time a bad political move causes the DOW to fluctuate or mortgage rates to spike. The fun comes in knowing that even when I sleep, I’m still earning money. When I’m working, I’m earning my wage was well as money from all of my investments. I don’t have to work as hard but I can make more money than the person sitting next to me for the same amount of work.

However, as much fun as it is when you’re performing well, investing can be tricky. A lot of investments, particularly stock market investments are volatile. Not only that, they are also not backed by the full faith of the U.S. government. My CDs are in a banking institution that carries insurance on my deposit up to $250,000. If I put that same amount in the stock market today, I could wake up tomorrow and have it disappear with no recourse. In a best case scenario, I will retire at 62 or 67 with a million dollar portfolio that will give me enough dividends to live on until I die. The goal is to not outlive my investments. But there are no guarantees. And even when I get my way, I’m still going to be subject to both emotional and financial roller coaster rides over the next 30 years.

None of this means that the industry is unregulated. The Securities and Exchange Commission is the agency that oversees investment advisers and enforces securities laws. But they are just there to make sure that the companies don’t get away with committing fraud, not to guarantee your investments. And even with the regulations in place, even the law enforcement safeguards in place do not guarantee safety as you know by Bernie Madoff’s actions. So it is best to know what you are doing and how to protect yourself by being informed. There is a plethora of resources available and I hope to share them with you here.

Path to a Million: 2017 Q1

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This is my first update since the initial posts (announcing the start of the series and the pilot post). Things are going well, maybe better than I expected because a great thing happened: tax season! *eyeroll* (take some time to read this post about why it’s not a windfall you should rejoice in).

However, in my case I can rejoice just a little. Part of my big refund had less to do with my lax W4 allowances, but because we had some credits for energy efficient updates, primarily in the form of solar panels and we were able to use the cost of depreciation to offset our rental income.

Tax season came through for some serious debt reduction which had a snowball effect on our net worth. It will reduce our liability (once I get around to actually making the large payment) and free up cash that was normally going to satisfying my monthly student loan payments, to put towards investments/savings. This really does show the positive effects and importance of eliminating debt. Of course, we continued to pay down all our other obligations as well, but using our refund to all but eliminating student loans will make the most significant impact.

 

NW

 

Last quarter, I recorded my net worth at $369,922. This time, it’s $389,213, up $19,291. This represents an average increase of just under $6,500 every month. Although most of that is achieved by reducing debt, it’s a start, and a very good one. Debt plays significant role in our financial struggles and if we can consistently decrease our debts over time rather than add to them, we have the right attitudes and the necessary tools to build wealth, because the idea is that, once the debt is gone, we can use the same disciplined approach towards investing to gain even more speed towards financial independence.

*See Pilot post for more info on loans.

10 things everyone should do before 30 to improve their financial lives

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Whether it’s due to helicopter parenting, growing up in rough economic times, or some combination of both, millennials are not thriving economically. It is becoming such a problem from older millennials like myself who have been out on their own for a number of years, that people are actually cashing in on our generation’s lack of preparation. I was listening to an NPR piece about an “adulting school” where young adults can enroll in classes to learn basic skills like folding fitted sheets (seriously!), creating a budget, cooking basic meals, understanding banking, etc. People enroll in those courses because they don’t know where to start. So today, I’m offering you a starting point: a list of what you should have a handle on to ensure a smoother ride. At least, if you do decide to enroll in adulting school, you’ll know exactly what classes will fit your needs.

  1. Have emergency savings of at least $1,000
  2. Be free of credit card debt
  3. Have concrete goals for the short, intermediate and long term
  4. Start saving for retirement
  5. Learn to cook 5 nutritious meals
  6. Learn investment basics
  7. Have a budget and stick to it
  8. Be adequately insured
  9. Give up instant gratification
  10. Improve your credit score

 

Path to a Million: 2016 Q4

This is the first installment in my “Path to a Million” series. I will use these posts to track my family’s net worth over time to record the progress we try to make in reducing expenses, eliminating debt, increasing our income and saving as much as possible to retire early and in style.

I have chosen a quarterly format which will give me enough time between updates to make leaps, recover from setbacks and fine tune anything that might not work as well as I would have wanted to. But it’s frequent enough to make it consistent, keep it interesting and prevent me from being complacent. I will also schedule it for the last Monday of the quarter, making it a “Monday Motivation” post both for myself and for those who might stumble upon it.

With that said, I am a bit apprehensive about posting this. For starters, it feels a little like financial exhibitionism. Telling people how  much you are worth in detail is like being naked, in part because of the stigma we attach to money. We tend to tie our self-worth to our net worth, in part due to a capitalist society built on poverty exploitation that has turned us into money-worshiping cult followers. In fact, even rich people have been known to inflate how rich they are, with some resulting to threats of litigation when the overinflation of their wealth is brought into question. (I don’t want to get sued so I won’t say his name, but you know who he is…)

But I’ve decided that I have nothing to be ashamed of. If anything, my story is one of inspiration. What do I have to lose by telling it? Either a bunch of people are going to see the details and be inspired or no one will even see it. I can’t lose and scenario 2 is more likely to happen anyway.

I am a 31-year old first generation American woman of color who started out with $5,000 almost 10 years ago in May of 2007 when I finished my bachelors. That $5,000 was composed of $1,000 I had saved after working part time all 4 years of college, $1,000 my dad gave me as a graduation present and $3,000 I got in monetary gifts from various guests at a surprise party my cousin threw for me. My first experience at “investing” was putting that  $5k in a long-term CD at Bank of America  where I was getting 5% at the time. That CD, my clothes and a 2000 Honda Accord was all I had in my name. No inheritance, no stocks, no homes. While I know I’m more fortunate than many others, I still have to point out that this was as close to starting from scratch as you could get. But I’m on a path to a million and I want to take you with me one quarter at a time. Your first insight is how  things have changed 9.5 years later.

Without further ado…

 

Should You Pay Your Children’s Higher Education?

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I had this discussion with a co-worker a few months back when he said that he was at odds with his wife over their daughter’s tuition bill. She did not think it was a good idea for them to co-sign a loan for her. I wasn’t sure if he was asking for my opinion or just venting, but I wouldn’t be me if I didn’t put in my 2 cents. So it became of matter of to pay or not to pay.

I came up with a little test to help you figure out which way you should go. It’s as simple as answering YES or NO to the following questions:

Are you debt free? – Credit card debt, your own student loans, car note, etc.

Is your primary home paid off?  – No other bills besides taxes, utilities, association dues, etc.

Are your retirement accounts maxed out? – The IRS released the 2016 401K contribution limits here.

Do you have enough in an emergency fund? – Minimum 3 months of living expenses.

Are you adequately insured? – Health, life, personal property, car and homeowners.

If you answered YES to all of these questions, you can afford to take whatever money you have left, after meeting all your obligations and putting food on the table, to pay for your child’s high education. If you have enough to pay the entire bill, more power to you. If you’re just contributing to part of it, well your kid should be grateful nonetheless.

If you answered NO to any of these questions, you CANNOT afford to pay for your child’s school and he or she needs to figure it out. Why? Because your creditors are not going to care that it ain’t cheap for Junior to go to Stanford. They’re going to want their money and they will make your life miserable, as well as ruin your credit to collect their funds. Because it would suck for Junior to come home for thanksgiving break and find you homeless after a foreclosure. Because the older you get, the less time you have to work and save for retirement and NOW is always the right time. Because an emergency could set you back financially for years to come. Because not having appropriate insurance can put you or your survivors under extreme financial strain.

But this guy asked about student loans, not tuition. The answer is no. Don’t do it. Let me make this clear: NEVER CO-SIGN A LOAN FOR YOUR CHILD’S TUITION. If they die, you are stuck with the payments. If they default, you are stuck with the payment. If they drop out of school and default, you are stuck with the payment for a degree they didn’t even get.

I graduated college at 21 and started working 2 weeks later. I later got an MBA while continuing to work. So I have worked uninterrupted ever since undergrad, and I plan on retiring at 65, sooner if I do well on my investments. That’s 44 years of potential for full time work where I can earn enough money to pay my own bills. My parents are in their 60s and my dad is thinking about retiring within the next 2 years. Do you think it would have been fair for him to be looking down the barrel of 10 years of loan payments? Who can afford it the most? My father or myself? Even if I lose my job, I probably won’t be out of work for 30 years. My parents will be if they live 30 more years (which is not too far fetched because my grandma is 90 and my grandfather died at 94).

They have the rest of their lives to work and pay back their school loans. You have maybe another 15-20 max left of working and saving for retirement. How much blood pressure medication co-pays do you think your social security checks will cover after you’re done paying for your child’s student loans?

If you don’t believe me, maybe you’ll believe someone who already made the wrong choice on that one.

The Balancing Act

I logged into my bank account this morning to pay some bills as well as make some transfers. Then I started to think… We often hear people say that we have to save both for short-term rainy days as well as our golden years when we may not have as much earning potential as we did when we were younger. However, many of us are in debt. This has to be one of the most severely indebted generations in American history. So how do we decide what to prioritize? If you’re wondering how you can possibly save when you have creditors breathing down your neck, I have to say you are certainly not the first to wonder that. I asked myself the same question in the past, which has allowed me to come up with a system that makes sense.

It all comes down to balance, common sense and some basic math.

Many people who find themselves in debt, are in that position because they indulge. But that’s not representative of everyone. Some people simply live paycheck to paycheck and a minor emergency subsequently morphs into a gremlin they can’t control. A bad flu landed them in the hospital with a high co-pay, a busted transmission on a car that was paid with a credit card, a broken AC system, can all conspire to derail even the most disciplined.

This means, your first step is to eliminate one of the primary sources of sudden insurmountable debt. If you had a leak in your house, would you start mopping up the water before plugging the hole? Because you can mop all you want, but if you don’t take care of the source, you’ll be mopping every time it rains. The best way to tackle that is to have a decent emergency fund. That will mean you’re prepared to pay for an emergency without having to charge your credit card. Some people recommend 3-6 months of living expenses, others have said 8-12 months. I think it depends on your personal situation but I’m a fan of the 6-month guidance if you have a spouse, and if you are single and on your own with no one to help contribute to your salary, I’d say err on the side of caution and have 9 months stocked away. Of course, you’re not going to accumulate that quickly, but it’s ok to take your time. What matters is that you’re working towards it.

Next, pay your debts, and do it aggressively. For example, my student loans are $400/month, but I pay $800. The extra $400 gets applied directly to my principal, shortening my payment period and reducing the amount I have to pay interest on. If something happens (i.e. breaking my dishwasher and paying $500 for a new one), I can choose to not pay the extra $400 for the month I have the unexpected  expense. I make sure the minimum amount is on auto-pay, and the remainder is paid at my convenience. The more you pay, the shorter your payment term and the less it costs you in the long run, helping you get out of debt faster and cheaper.

Finally you can start saving! Why is saving for non-emergencies dead last on the list? Think about the interest rates banks are paying us these days. In fact, think about the BEST advertised rate you’ve seen in recent weeks or months. What was it, 1%? Maybe 2%? What sense does it make for me to save at 1.5% and not paying my loans which are costing me 5.9%? I’m actually losing 4.4% overall. It really makes no fiscal sense. I already have an emergency fund, a home, and two solid cars. This means, anything I save beyond is money I’m not paying my debt with.

What’s your balancing act?