Why Creating Systems Trumps Motivation

I vividly remember the first time I saw Rocky as a kid.  Just a lowly local fighter, Rocky Balboa had to go through so much to get ready for his big fight with the champ Apollo.  After watching the iconic training scenes of him running up the steps of the Philadelphia Museum of Art, punching giant slabs of meat until his hands bled and doing those grueling one handed pushups, I was so pumped to try to be like him.

So the obvious next step for me was to start running up stairs and punch things day and night.  I would be the best boxer this world has ever seen. After 2 or 3 days of this rigorous training, I slowly fell back into my normal routine and completely forgot about becoming the best boxer in the world.

But I didn’t just forget.  I simply lost my initial burst of motivation.  That little spark that got me off of my couch was great for those first few days. But there was no structure or foundation behind it so it quickly fizzled out.

If I seriously wanted to become a real boxer, I would have done found a coach and schedule boxing sessions at a gym regularly throughout the week.  Since a strong training foundation was never built, my initial burst of motivation was destined to fail.

Motivation is Finite

This same phenomena can be found in the world of personal finance.  We’ll watch an intense movie about stock picking or read an inspiring post about someone who paid off massive amounts of debt.  This will get our juices flowing and we’ll just go out there and do some things for a short while. But it will usually fizzle out in the end.

Relying solely on motivation is not the way to get ahead financially.  In fact, I would say that getting motivated and failing over and over will simply get you so depressed about your financial situation that you might just give up on improving.

But it can get better.  And the way it can is by having a framework or system in place that will keep you financially secure without having to constantly draw from your finite well of motivation.

It’s important to realize that this is THE ONLY way to get ahead financially.  Whether you’re looking to build the next billion dollar company, want to increase your investment contributions or just track your finances, you need a system that will make it easy to reach your goal.

And there are so many financial goals out there.  Setting up a budget, saving for retirement or college, starting a successful freelance business, getting a world class education to increase your income.  These are all worthy financial goals that require a systematic approach in order to find success.

Just Get Started

As mentioned before, setting up a systematic method of attack is the best way to achieve your financial goals.  And it’s not even that hard. It just takes a few upfront steps and some experimenting to get your system right.

In fact, setting up systems is much easier than relying on brute force motivation to achieve your financial goals.  It gives you a path to follow and you just plug along day after day.

Here are some basic systems everyone should have for various aspects of their financial life.  These are easy for almost everyone to implement so give them a try if you haven’t already:

Automatic Bill Pay:  We all have the same bills to pay.  Electricity, water, rent/mortgage, tuition, daycare etc.  Keeping all of these bills in order and remembering to pay them off month after month can be a chore.  Having a stack of papers and writing checks and mailing letters is not a difficult task, but it takes up precious time.  You increase your chance of missing a payment this way which can incur fees and possibly ruin your credit.

Instead, take some time out to set up automatic bill pay.  Most companies allow this by entering your checking account info on their website.  If they don’t have that capability, almost all checking accounts have an online bill pay feature which allows you to send a check to any address at no cost.  

Set these up to occur at regular intervals and you will never have to worry about keeping your routine monthly bills in order.

Saving and Investing:  Whether it’s investing for retirement or starting a rainy day fund, most people’s strategy is to just throw whatever they have leftover at the end of the month towards savings.  And considering that more than 75% of Americans are living paycheck to paycheck, this is not going to amount to much.

A much more effective way to save is to have a certain amount of money deducted from your checking account into your investment or savings accounts at regular intervals.  This allows you to grow money at a constant rate and will create a sort of “scarcity mentality” that will not allow you to spend money you don’t have.

This can be done a number of ways.  Almost all employers will automatically deduct 401(k) contributions before your check even hits your account, so that one’s pretty easy.  But if you have your own personal investment or savings account you are in charge of, you can easily set up a direct deposit from your checking account at any interval you choose.

Personally, this systematic approach to saving and investing has had a major impact in my life.  I know myself, and I would never consistently put money into my investment accounts if I had to do it manually.  Automatic investing is so easy to set up and is such a game changer I would recommend it to every single person.

Even if you can only start with $20 per month to contribute to your savings account on a regular basis, I would still recommend it.  It’s better to start somewhere than not begin at all. You can always increase your contributions later.

Tracking your Spending:  Gone are the days of balancing your checkbook to make sure you have the right amount of money in your checking account.  You can do almost everything personal finance related online nowadays, and tracking what you spend is certainly no exception.

Instead, I recommend leveraging the power of technology to set up a system to track your spending.There are so many websites and apps out there that allow you to track what’s coming in and what’s going out.  All you have to basically do is connect your accounts (checking, savings, credit card etc.) to the website and they will usually display your transactions on a nice little dashboard. You can then see exactly where your money is going.

I personally prefer Personal Capital.  You can not only track your spending, income and debt accounts, but it gives you a nice detailed look at your investment accounts as well.  You can see in which sectors you may need to invest more in and if you’re paying too much in fees. It’s pretty much a one stop shop for your finances and they are always improving their product.

Investing in Yourself:  While no one is going to directly pay you to do some yoga, investing in yourself is essential to being financially successful.  Self investment can come in so many forms such as exercise, taking classes, reading and meditation.  You have to find the areas that are important to you and your finances and work on them consistently.

Again, you can use technology to set up systems towards your self improvement.  And it doesn’t take much. You can simply set reminders on your calendar when you want to do some reading or exercise.  Or you can block out a certain time of the day to perform your self improvement tasks.

It’s especially important to set up systems for this.  Self improvement tasks fall under the “Non-Urgent but Important” group of tasks.  This makes it easy to justify taking care of the latest “emergency” before you get to your self investment time.  Don’t fall into this trap that and make investing in yourself a priority by setting up a solid and executable plan of action.

Conclusion

I would argue that not setting up systems for your finances is the true reason people don’t reach their goals.  Most people rely solely on willpower and motivation to try to make their situation better, but that really is a limited resource.  

Setting up systems of action is how giants like Oprah, Steve Jobs and Kobe Bryant became wildly successful.  They found a system that worked for them and kept at it until they got what they want.

The vast majority of Americans are living a paycheck to paycheck life because they don’t know where their money is going and they are not saving or investing enough.  These two huge problems can be solved by setting up systems that make personal finance as easy as a late round Rocky comeback.



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The Sharp Bite of COBRA Insurance

So I’m self employed now. I made the change about 6 months ago and am winding down from being an employed optometrist. Working for the man can become tiring.

But one thing working for the man did provide was health insurance at an affordable price. Now that I’m not employed full time, we had to fend for ourselves in the glorious US healthcare system.

Most large companies provide some sort of subsidized health insurance for their employees. You sign up for the plan, and the premium is taken out of your paycheck. Employers will usually foot half the premium while you pay the rest. Not a bad deal AT ALL!

In my case, it was a 50/50 split. I paid about $630 per month and my employer paid $630. The plan was a pretty decent HSA eligible plan so it worked well for us.

Once I left the company, I had 3 options:

-Stay on the current health plan aka COBRA

-Find a plan on the marketplace

-Sign up for some other “alternative” types of insurance such as preferred risk plan and health sharing plans.

The marketplace plans were much too expensive and we didn’t qualify for the health sharing plans since you have to be Christian to join them. And I don’t think they accept fresh converts.

So we decided to go with COBRA. And it has been an experience to say the least. Let me first give you an overview of COBRA insurance.

Premium times two

COBRA stands for Consolidated Omnibus Budget Reconciliation Act. Definitely not as scary sounding as the acronym. It’s a federal law that allows for health benefits to continue for someone who has experienced a job loss or other major life changes.

In my case, by signing up for COBRA we could continue on our current insurance plan without any interruption. Sounds pretty easy right? It is, but it comes with a price.

When I was employed full time, I paid $630 a month and my employer paid $630 a month to cover the monthly premium. But on COBRA, I have to pay the entire $1,260 premium on my own.

The law says I can be charged up to 102% of the premium, which I certainly was. Along with dental insurance which I paid very little for with my employer, my grand total came out to be about $1,400 per month.

The sort of good thing is, I knew this going in and factored it into my decision when becoming self employed. But going from $630 a month to $1,400 a month for health insurance is still taking some getting used to.

So while it was nice to continue my health plan and maintain all the deductibles I had already met, the monthly premium was not so nice.

Silver Linings

Health insurance is an issue for the self employed no doubt about that. Any entrepreneur will tell you that. But its not all bad.

While I do have to pay for health insurance directly from my checking account, the premiums will be an above the line tax deduction. This is pretty much the same as having a pre-tax deduction being employed, so it’s not really an advantage. But it’s nice to know I’ll be getting similar tax savings.

Being able to continue my coverage with COBRA also allowed us to keep our deductibles. We had kind of a busy healthcare year early on so we already met our deductible before I left the job. So it’s nice to have a few months of no more deductible to worry about.

Especially since there is another baby on the way! That’s right, number 3 is around the corner so it’s imperative that we keep those deductibles met for all the hospital bills.

So while health insurance can be a drag for the self employed, there are options. And you need to compare and see what the best option is for you and your family.

Even if it is a snake bite from a COBRA. Which I hope is a covered treatment!

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February is Failed Resolution Month

Make Goals Great Again!

Did you make a New Years resolution for 2019? Most likely it has failed by now. Not that I know you personally or anything. But research tells me so.

It’s estimated that 80% of New Year’s resolutions fail. When they fail can vary, but I would guess around February sounds right since it’s tough for most people to do anything new for a month. Myself included.

Most resolutions are usually health or money related. Not surprisingly, I will focus on how to meet money resolutions. Although health and money are related in many ways.

In any case, here is why I think most money resolutions fail and how we can make resolutions that stick.

SMRT. I mean SMART

Most of us know what SMART goals are. It refers to goals that are Specific, Measurable, Attainable, Realistic and Timely. We’ve all seen this acronym many times.

But as with most things money, knowledge isn’t everything. Execution is where people go wrong. Setting SMART goals is the key but I feel most people just gloss over it or aren’t specific enough.

A big reason why most people don’t adhere to the SMART goal philosophy is that their goals really aren’t attainable. An example is someone who makes a goal to earn $100,000 in 2019. While it’s better than a general goal of “make more money”, this goal still has some flaws.

If this person is used to making $50,000 a year, getting to $100,000 a year is going to be tough. You could break it up even further and say the goal is to make $8,333.33 a month. But if the first few months don’t go right, which is likely since the beginning is always the toughest, then they might abandon the goal.

So what’s the best way to use SMART goals for the New Year? You should still make them specific, measurable and have a timeline. But you need to make the first step ridiculously easy.

Momentum is the key

Let’s say someone made a goal to save 20% of their income in 2019. A worthy goal indeed. But if they are currently saving 5%, it will be pretty tough to crank up the savings rate by 15% and not feel shell shocked.

Make the first step easy. Save 1% more for January. That’s it. It sounds stupidly simple but this is where the battle will be won. By the end of January, they will be saving 6%. Do 1% more for February, and repeat until the end of the year.

The momentum will likely carry this person to their goal. Maybe one month they can save 2%. But June is a tough month and they can’t save any extra. There will be ups and downs but by working on finding ways to save just a little more each month this person will get a crash course in being financially savvy.

After the year is up, they might by at a 16% savings rate. Didn’t quite get to 20%. So is the goal a failure? Absolutely not! Because you can do the same process for the following year and easily get to a 25% savings rate.

All from the first initial easy 1% savings increase. Momentum is a real thing and putting too much pressure on yourself too quickly greatly decreases the chance of hitting your financial resolution

The Big Picture

As humans, we tend to overestimate what we can accomplish in a year. But we also greatly underestimate what we can accomplish in 5 years.

This is essentially the problem with goal setting. We set our sights too high to achieve a short term win. But if we take smaller steps and are okay with stretching our timeline just a little bit, momentum will help carry us to our goals.

Let’s not make February the month where goals come to die for The Broke Professional readers. Just recalibrate them and keep on moving forward.

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4 Reasons why an Emergency Fund is Crucial

The average person has many financial steps they need to take.  They need to make an income.  Preferably doing something that is not soul crushing.  They also need to make sure they are saving enough for retirement.  The government will not bail out the average American unfortunately.

If you have kids, college savings are important since tuition is rising rapidly.  And people also want to have a little fun with their money.  Imagine that.

With all these pressing concerns, the tried and true advice of having an emergency fund can become a second thought.  But it shouldn’t.  It should actually be the first thought and will provide the basis for every other financial goal you’re pushing for.

Here are four reasons why emergency funds are important.  I’m sure there are more than four reasons, but I just can’t think of any others at the moment:

Not having one can derail EVERYTHING: I mentioned retirement and saving for college.  Most people like making regular monthly contributions to these accounts to keep them well funded and growing.  But what if you get hit with a big medical bill?  What if the car’s transmission goes out?  What if the AC decides not to work?

Many people have to stop their monthly contributions to other plans in order to pay for such an emergency.  This means less growth and less money for you in the end.  Sometimes a lot less.  An emergency fund will allow you to keep on your financial path without skipping a beat.

Emergencies are inevitable:  Many people view emergency funds as just a “rainy day” fund in case something crazy happens in life.  The fact is, crazy things happen to EVERYONE at some point in their life.

It would be safe to say that everyone has had some type of financial obligation pop up that was not planned for.  Cars break down, people get sick and pipes burst.  Once you plan that an emergency will happen that will require some cash and fast, it makes it that much easier to save for that inevitable day.

Avoid credit card debt:  Credit card debt is one of the worst debts out there.  But it is so very easy to get into it.  You can’t go to a grocery or department store without being asked to sign up for a card.

Because credit cards are so easy to get, some argue that you should use credit as your emergency fund.  It’s easy to get and many people can get cards with limits of at least $5,000 easily enough.

But the problem is that even if you have every intention of paying the bill off in full, life can come at you fast.  You may be okay paying the minimum payment until you can get some more money.  Once you start down that very slippery slope, it can be very tough to recover.

Avoiding credit card debt is probably the one thing that will give people the best chance to have a great financial life.  And having an emergency fund full of cash will let you do just that.

Peace of mind:  We all talk about wanting financial peace or financial freedom.  Whatever your definition of that is, the fact is that having a solid emergency fund will help you get there.

When you hear an unfamiliar sound coming from your car or you notice a leak from the water heater, you will of course try to fix the problem but in the back of your mind you will know that there is enough cash to cover it.  There is no panic that needs to be experienced.

At the end of the day, peace of mind is one of the signs of someone who is financially free or on the path to get there.

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Valuable Above the Line Deductions

Make off with the deductions you deserve

Not sure if you heard, but a new tax law went into effect for 2018. I wrote about some of the major changes here.

One of the goals of the new tax plan was to make the tax filing process easier and simpler. While the jury is still out on that, one thing we can count on is that more people will be taking the standard deduction instead of being able to itemize their deductions.

The main reason for this is the limitation on the State and Local Tax (SALT) deduction to $10,000. The SALT taxes comprise of a number of different types of taxes, but the main one that will affect most people is property tax.

This is especially a huge blow for those living in expensive cities such as San Francisco or New York, where property taxes alone can be $20,000, way over the $10,000 limit.

So with the hard limit placed on SALT and the doubling of the standard deduction, fewer people will be able to itemize their deductions. That’s definitely a bummer, but all is not lost.

Above the Line deductions to the rescue!

Walk the Line

Deductions taken above the line have always been valuable. The “line” refers to your Adjusted Gross Income (AGI). Many tax breaks and credits are calculated based on your AGI.

And most of them start phasing out if your AGI is too high. That’s why above the line deductions are so powerful. Not only do they reduce the income that you’re going to be taxed on, they can also make you eligible for even more tax perks.

For example, the American Opportunity Tax Credit is a nice credit for tuition and other education costs. You can get up to $2,500 off your tax bill. That’s powerful.

But if you’re a married couple in 2019 and your AGI is above $180,000, you cannot claim the credit. A big loss.

Another good example is a Roth IRA. They are awesome accounts that allow you to save tax free money for retirement. But if you’re a married couple that makes more than $203,000 in 2019, you can’t contribute to a Roth. Another big loss.

I hope you can see the importance of keeping your AGI as low as you can. Since most taxpayers will be using the standard deduction under the new tax law, above the line deductions become all the more valuable in reducing your tax bill.

Low Hanging Fruit

Here is the actual list of above the line deductions taken directly from tax form 1040:

These are the big juicy deductions to focus on. What jumps out to me is that there are two no brainer deductions that most people can take advantage of.

Health Savings Account deduction. HSA’s are one of the best accounts out there. And if you have a high deductible health plan, which many people do, you can contribute to one. You can reduce your AGI by contributing to one, and any investment growth is tax free as well.

If you’re employed, you can simply get the contributions taken out of your paycheck. Easy enough. If you’re self employed, just report your contributions on that line 25 to get your above the line deduction.

-IRA contribution. This is another nice deduction you can use to reduce your AGI. It’s important to note this deduction refers to Traditional IRA’s. Roth IRA contributions are not tax deductible.

For 2019, you can contribute a maximum of $6,000 to an IRA. This will beef up your retirement savings while reducing your taxable income. A true win-win.

If you’re employed and are offered access to a 401k, you can still contribute to your own Traditional IRA, but there are income limits. If your tax filing status is single and your income is more than $74,000, your contributions are not tax deductible. $123,000 is the limit if married.

But no need to fret. The contribution limit of a 401k plan in 2019 is $19,000. More than triple that of an IRA. That’s income that is not reported on your W2, effectively lowering your AGI. Take full advantage of this if you can.

Student loan debt is not something you want to keep around too long, but it’s nice you can get an above the line deduction for the interest paid. In fact, if you have some low interest loans (below 4% in my book) that don’t keep you up at night, it can make sense to keep some of it around.

The reason being that compound interest from investing is most powerful when you’re young. If you invest early and often while keeping low interest student debt that will give you a little deduction anyway, it can be a nice wealth boost. Just a thought.

If you’re self employed, you have a few more opportunities to get deductions. You can deduct your health insurance premiums and part of the self employment tax.

I’ve been paying COBRA premiums since I recently became self employed. COBRA is much more expensive than what I was paying for health insurance as an employee, so it’s nice that I will be able to deduct that on my tax return.

Take what you can get

Paying more taxes than you should isn’t patriotic. The government lets us take deductions for a reason, so take advantage of them. The two big ones everyone should try to take advantage of are HSA and Traditional IRA contributions.

Almost everyone should be able to contribute to these. And they have the compound effect of increasing your retirement savings and reducing your AGI, possibly opening the door for even more tax credits. Can’t think of a more slam dunk way to increase your wealth.

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The Most Effective Way to Avoid Burnout

Burnout doesn’t really have an official definition. But it can be characterized by bouts of depression, hopelessness and feeling flat from being stressed out at work.

Anyone can experience burnout, but it is pretty common among high income professionals such as doctors, lawyers and dentists.

Doctors are especially prone to feeling burnout out from work. Depending on the specialty, the rate of burnout can be anywhere from 30-40%. This is a popular article by a surgeon in Australia about the particular reasons physicians are feeling stressed and burnt out. Pretty fascinating read.

Burnout is real. So how do we address it? There are a number of ways including increasing morale and decreasing administrative tasks so professionals can actually focus on their job.

But this being a personal finance blog, I’m going to propose a financial way to help deal with burnout. And it’s pretty simple: Make enough money and have a plan for it.

Money = freedom

There are lots of ways people deal with burnout. And most of them involve escaping to something else like alcohol, food, television or medication. All valid ways to deal with stress and burnout.

Valid, but not very effective. In the end, burnout is largely due to lack of control. You can’t control your hours, your co-workers, the weather etc.

Most people also can’t usually control how much money they make. While money isn’t everything, I feel it plays a huge role in the potential for burnout.

Let’s say a doctor is being forced to work hard 80+ hours a week with very little sleep. His salary is $50,000/year. I guarantee you that doctor will start looking for the exits real soon.

How about he magically gets a raise to $500,000? He will definitely stick around that job longer despite the hard work. But he may start looking elsewhere after it just gets to be too much.

Now how about he gets a raise to $5 million? That will be the most loyal doctor you will ever see and burnout will be the farthest thing from his mind.

While this is an extreme example, it does show that if financial security is there, the risk of burnout will decrease. But we all can’t just pull a lever and make more money appear. Increasing income is a long term process that takes some trial and error. But for someone who is staring burnout in the face, time is one luxury that they don’t have.

So the focus should shift to what you can control. Specifically, how you spend your money and your overall financial plan.

Focus on what you can control

People who are stressed usually spend money to make themselves feel better. But it’s only temporary, and then you have less money. Which makes you more stressed.

So the first thing I would recommend is to find your biggest spending leak and plug it. Whether it’s eating out, drinking out or shopping, you need to cut the spending or risk facing burnout.

If you successfully do that, you will have some extra money every month. Now comes the important part: Make a plan for that money. You don’t need a full on financial plan that has retirement projections for multiple scenarios. That will come when you have more time and money.

Just make a simple goal for that money. For example, if you have an extra $200 every month, set up an automated savings plan into a Roth IRA. Or if you need some more in your emergency fund, send the money there every month.

The important thing is to do it and make it automatic. This will be a nice first step to financial independence and allow you to take back some control in your life. Which will eventually help minimize your chances of burnout at work.

Once you’re able to save more money, and hopefully make more as well, you can continue to take some more control by adding more money to your existing plan. Or you can make new goals such as saving for travel, a home or even working a little bit less.

Now that’s real control.

Burnout is Real, but not Inevitable

I have to admit, working in a corporate environment is tough. While I have thankfully never gotten to the point where I just want to walk off the job, I have experienced stressful situations which can make me wonder what I’m doing with my life.

But money can be a good motivator. And if you have a plan for your money that will eventually lead to financial independence, you will be able to tolerate a lot.

Obviously, if you are in an overly stressful and toxic environment which is affecting your health and well being, you should find an exit plan. But having a solid financial foundation will let you make the best decision for yourself and your career.

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Dancing is Not a Good Investment Strategy

If your investment strategy was a dancer

1/11/2019:  I thought this would be a great time to re-post this, since many people are starting to dance with their investments!  There has been some ups and downs in the stock market the last month or so, and it’s making people do weird things.  

I’ve heard many people say that they are stopping their retirement account contributions or moving some of their stock positions into bonds or money market accounts.  Don’t do these stupid dance moves! 

Making investment decisions for retirement money based on a few weeks activity is almost guaranteeing that you will retire with less money.  Just keep contributing and rebalance as you have been, and you will come out on the other side smelling like a rose.

Investing is a patient man’s game.  This applies to almost any type of investing including real estate and stocks.  In general, if you’re investing for the long term (more than 10 years), the best strategy is to have a great plan and stick to it.

Unfortunately, many impatient men (and women) are investors.  This means many plans never make it past the first big market drop.  That’s usually when panic sets in and investors do something short sighted.

A 2015 study proves exactly this.  The study shows that we are our own worst enemy when it comes to investing.  And no other reason even comes close.

Let me set the stage by showing you the study results and what we can learn from them.

People are Not Good at Investing

I recently wrote why many investors are their own worst enemy when it comes to their investment performance.  While the subject of this post is similar, after reading the results of the aforementioned study I felt a separate post was needed.

The study was conducted in 2015, and at the time the S&P 500 Index had a 30-year annualized gain of 10.53%.  That means that every year for the last 30 years, the S&P gained an average of 10.53% per year.  Some years were way more and some years were way less (think 2008).  But on average, a nice 10% return every year.

What this means is that an investor who simply held an S&P 500 index fund for the last 30 years should have returned 10.53% minus fees.  Let us say this investor had some crazy fees which brought the return down to 8%.  Paying high fees is annoying, but 8% is still not a bad overall return.

According to the study, the average investor didn’t do this well.  In fact, they did a lot worse.  The study found that the average investor returned 1.65%!

1.65%!!!???  They might as well have put all that money into an online savings account and saved themselves the stress of investing.

This means that the average investor is probably not using index funds.  And if they are, they are using the wrong ones or are just going in and out of investments way too much.  I think the latter is the culprit for most investors.

Dancing In and Out of Investments

“Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.” -Warren Buffet in his 2012 letter to Berkshire Hathaway shareholders

(The basic game is investing and Charlie refers to Charlie Munger, Buffet’s partner at BH.)

As Mr Buffett explains in this quote, “dancing” in and out of investments is very risky.  I firmly believe this is why the average investor does not even come close to the returns of the S&P 500.

But why does going in and out of investments produce such poor returns?  Shouldn’t we always be looking to get out of our investments when things get bad and find some better places to put our money?

The answer is yes, we should be looking for better places to invest.  But the best place to invest is usually in an index fund that follows the overall market.  And it’s almost impossible to find another group of investments that does better than the overall market on a consistent basis.

And by dancing in and out of investments, most people are actually buying high and selling low.  We should always try to buy low and sell high!  People usually panic and sell investments when things get bad (sell low), and then they try to buy into investments that everybody is saying is “safe” (buy high).

A great example is the recent Brexit vote that will lead to the UK withdrawing from the European Union.  It was expected that the stock market would fall after the vote was yes, and it did just that.  The day after the vote was final, the S&P 500 dropped 66 points, which was about a 3% loss.  Not a huge drop, but pretty decent.

But if you turned on any form of financial news, you would think the Four Horsemen were arriving.  Predictions that the international markets will be in turmoil for years was the theme of the day.  The S&P actually did fall about 1% more the next day, which lead to more doom and gloom.

But about 10 days after the Brexit vote, the S&P 500 was right back to where it was before.  And as of now, 2 months after the vote, the S&P 500 is about 3% higher than it was pre-Brexit!

The Big Takeaway

What this all means is that if you were one of those investors who panicked and sold some stocks after Brexit and then bought more stocks when the market rebounded, you were dancing in and out of the market which means you were selling high and buying low.

And this is why the average investor averages returns a little over 1%.  As the study showed, just owning an S&P 500 index fund for the last 30 years and not doing anything with it would get you a 10% return.

The best course of action for investors who don’t want to make stock picking their full time job is to formulate an index fund strategy that is appropriate to your investing timeline.  Pick the funds.  Rebalance the funds every year so they don’t get too out of wack.  And then leave it alone.

You will be a better investor than the majority of America.

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Don’t Laugh at the Latte Factor

If you need this every day, then you don’t value money.

Some personal finance concepts will live on forever. Pay Yourself First is one of them. Debt Snowball is another one. And of course from uncle Dave Ramsey himself, “Live like no one else so you can live like no one else.”

But the one I want to talk about today is the Latte Factor. It’s a term that has been in the personal finance lexicon for over a decade now, but it is still somehow a polarizing subject.

David Bach first officially introduced the Latte Factor in his book The Automatic Millionaire. This was actually the first personal finance book I ever read and sparked my interest in the subject. A really good book for people at any stage in their finances.

In the book he talked about the ability to give up spending money on something and redirecting that money into savings. The example he gave was of giving up your daily latte. Thus, the Latte Factor.

The numbers are actually pretty amazing. Say you spend $4 every day on a delicious latte. (I worked at Starbucks for years so I know there are many people who do this.) Now instead of spending $4 every day on a drink, take that money and put it into an investment account.

Here’s what happens. If you put that daily $4 into a retirement account that gives you a modest 6% return, you will have $1,547.60 in one year. Not bad at all!

But if you keep doing it, the numbers get crazy. After 5 years, you’ll have $8,723.97. 10 years? $20,398.60. How about we jump to 40 years? How about you have $239,509.62! Just from giving up your little $4 addiction, you can rack up thousands of dollars pretty fast.

So why do so many people have a problem with the Latte Factor?

Overly Sensitive Coffee Lovers

Like I mentioned before, I worked at Starbucks during high school and college. It was at a new store in the mall and from the day it opened, it was packed every day. To say Americans are addicted to coffee is an understatement.

I would see the same people come in day after day for an expensive coffee and a pastry. This would easily be $7 a day. And this was 15 years ago. Starbucks is more expensive and this country is more addicted to sugary coffee and snacks.

So there certainly is a large part of the population that spends close to $10 a day at expensive coffee houses. (By the way, a daily $10 habit can turn into almost $600,000 after 40 years at a 6% growth rate).

And after reading criticisms about the Latte Factor, most people just seem to be mad at the idea of taking away their lattes. They say if you enjoy your lattes and they make you happy, keep them! Don’t let some cold financial guru tell you to stop your habit.

These people are not looking at the big picture. It’s not just lattes that are a candidate for the chopping block (which they should be since most lattes have unholy amounts of sugar). It’s anything you buy that isn’t essential and doesn’t bring you happiness.

Let’s make a list: cigarettes, alcohol, donuts, expensive cell phone plans, expensive car loans, fancy groceries, fancy shaving cream, movie theater food, airplane food, soda, bank fees, non-library books, barely used gym memberships, and so on.

Long enough list for you? Most people have many little expenses like this. Imagine cutting just half of them out and putting it towards your investment plan? I hate the saying, but you’d definitely be living your best life!

Conclusion

If drinking an over-caffeinated beverage spiked with sugar every day really makes you happy, don’t let David Bach or anyone else say you can’t have it. Just realize that you love lattes and high blood sugar more than money and continue to feed the addiction.

But try to look outside yourself and find out what non essential expenses you can cut or minimize. Once you can do this, funnel that savings right into your investment accounts and watch your wealth grow year after year with the additional latte flavored rocket fuel.

And with today’s technology, it’s easier than ever. When you pass by the coffee shop and have the urge to scarf down that overpriced scone, just pull out your smartphone.

Simply sign into your investment account, transfer that $5 from your checking account, and walk away with a smile knowing you are fueling your wealth and some billionaire CEO.

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Unforgivable Financial Sins

Committing these financial sins is like lighting your money on fire.

Most major religions have the concept of sin.  From my understanding of my own religion and other major world religions, sins are detestable actions that take you further away from the Divine.  Some sins have the double whammy effect of harming your soul and potentially messing up your life on Earth too.  Infidelity or drug use, for example.

Even those who don’t subscribe to a particular religion believe there are some acts that just should not be done.  Murder, theft and oppression come to mind.

I would love to go more into this, but I’ll save that for the theology blog.

I wanted to discuss some financial “sins” that can take you away from the “divine” (financial freedom) and can destroy your life.  While some financial sins can potentially affect your afterlife (think embezzlement and money laundering), the sins discussed here will be more of the mortal world variety.

Committing these sins can derail your finances and can sometimes be a gateway to even more financially devastating actions.  In no particular order, here are some of the more blasphemous things you can do to your finances:

Raiding tax deferred retirement accounts early

Retirement accounts such as 401(k)’s and IRA’s are the backbone of a solid retirement plan.  You contribute into these accounts during your younger working years so that you can hopefully enjoy a stable retirement down the road.

The government has put some restrictions on these accounts so people won’t just withdraw money from them as they please.  A common retirement account is the Traditional IRA.  According to the IRS (no relation to IRA), if you withdraw funds from a Traditional IRA before age 59.5 you will have to include the withdrawal amount in your taxable income along with paying a 10% penalty.

That’s a hefty fine for putting your hand in the retirement cookie jar.  If you are in the 22% federal tax bracket and you withdraw $100,000 from your IRA, you lose $22,000 of it from taxes.  Add the 10% penalty and your $100,000 withdrawal becomes $68,000!!

Think of withdrawing early from your retirement account as robbing an old man version of yourself.  That seems cruel.  You’re also sort of robbing your current self too with the huge tax hit.

So unless you’re in dire straits, don’t consider withdrawing from retirement accounts.  Your older self will thank you.

Carrying credit card debt

There used to be a time when credit cards didn’t exist.  People used to pay for things with cash and for the most part didn’t get into monstrous debt.

Nowadays, credit is easy to get which makes it much easier to get into debt.  Funny how that works.

In 2017, the average household credit card debt was a little over $6,000.  That is a bad enough number, but there are a lot of households that have no credit card debt.  So the ones that do have debt probably have much more debt than $6,000.

The sinful nature of credit card debt has to do with their super high interest rates.  Rates can vary widely, about 7% on the low end and 25% on the high end.  These types of rates will make it almost impossible to make any money investing.  Those high credit card interest rates will wipe out any potential investment gains.

Thankfully there are a lot of options to help you jump start your debt repayment.  You can do a balance transfer to a card that has a 0% promotional rate.  Just make sure to pay it all off before the promo rate ends.

Many companies, such as Lightstream and SoFi, also offer personal loans with much lower rates than a credit card would offer.  You can use these funds to pay off the credit card debt and work on paying back the much lower interest loan.

Buying a home when you can’t afford it

The American Dream of owning a home is alive and swell.  For whatever reason, people don’t think they’ve “made it” unless they own a home.  Which is dangerous because there are lots of people who should be renting instead of owning due to the current state of their finances.

Owning your own home can be downright expensive, especially if you stretched your home buying budget a little too much.  Not only do you have the monthly principal mortgage payment, you also have interest to pay to the bank (rates are rising!), property taxes to pay to the state and homeowners insurance to the insurance company.

Then you need to factor in maintenance costs.  Even if you buy a brand new home, things will break down and light bulbs will need to be changed.  And everything has a shelf life and will eventually need repair or replacement.  That includes the dishwasher, water heater, air conditioner and everything else that keeps your home comfortable.

If all of these potential costs make your head spin, maybe you should reconsider buying a home.  Paying rent is a simple monthly expense with no maintenance costs or strings attached.

The sinful part of buying a home you can’t afford is that it handicaps any other financial or personal goals you may have.  It gets much harder to find money to invest or travel if everything is tied up in the house.

These are three big financial sins that should be avoided by all.  One thing I’ve learned in life is if you can avoid the big sins and make small consistent virtuous decisions along the way, you will be just fine.

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Major Upgrade for IRA’s in 2019

We can pack a little more into our nests now.

The humble Individual Retirement Arrangement, known in most sane circles as the IRA, is getting a level up in 2019.  IRA’s should be a big part of everyone’s retirement plan, whether you’re self employed or working for another company.

People who make too much money according to the IRS can’t take advantage of some of the tax savings that IRA’s offer.  Let’s forget about those people for now and let them swim in their vault of gold coins.  (But there is even a change there so read on Scrooge McDucks).

For the rest of America, IRA’s are a great place to save for retirement because they can reduce your tax bill. They also provide flexibility to choose your own investments which may not be available in a company 401(k) plan. 

Let’s see what’s in store for IRA’s in 2019:

Raise the Limits!

IRA’s have limits on how much you can contribute each year.  This is a bummer for us but makes sense from the government’s point of view.  If there were no contribution limits, people would be putting their entire salary into an IRA and not paying taxes on it for decades.  Those potholes would never get fixed and bombs would never get made!

So while there are limits in place to ensure the federal and state government’s get their piece of the pie, the limits are increased from time to time.

And 2019 is one of those times.  

For tax year 2019, individuals can contribute up to $6,000 into their IRA, up $500 from 2018.  This applies for Traditional and Roth, or a combination of the two.  The total contribution between all the accounts has to be $6,000 though.  The catch-up contribution limit will be the same, $1,000 extra allowed contribution for those 50 years and older.

There are a number of rules governing the tax deductible status of IRA contributions.  If you and your spouse don’t have a retirement plan at work or are self employed, then each of you can contribute $6,000.  Giving you a potential joint contribution of $12,000 for the year.  Not bad at all!

It’s also worth mentioning that 401(k) plan contribution limits have increased as well.  The new contribution limit is $19,000, up $500 from 2018.

There are many people who may not be able to contribute the maximum amount to an IRA.  Don’t let that deter you from contributing at all.  Set a monthly contribution for what you can afford to contribute.  Try to find ways to increase your income or decrease expenses to raise that contribution amount over time.

Phase in.  Phase out.

Just as there are rules governing HOW MUCH you can contribute to an IRA, there are also rules governing WHO can get the tax benefits of an IRA.  And these limits have changed for the better as well.

These “phase out” limits are different for Traditional and Roth IRA’s.  In general, contributions to a Traditional IRA are tax deductible in the year you contribute.  But you will owe taxes when you take the money out in the future.

Roth IRA contributions are not tax deductible in the contribution year but you will avoid paying taxes on future withdrawals.  So it’s a decision between getting a tax break now with a Traditional IRA or a tax break later with a Roth IRA.

If your income is too high on your tax return, you won’t be eligible for these tax benefits.  People with high incomes are taxed at higher rates, so this is another way for the government to make sure wealthy people don’t hide too much of their money and avoid paying taxes.

The good news is these phase out limits have slightly increased from last year, so more people will be eligible to contribute to IRA’s.  For the sake of simplicity, I’m only going to refer to the limits for those who are married filing jointly.  To see the info for all other tax statuses, click here.

For Traditional IRA contributions, the income limits differ if you or your spouse have access to a retirement plan through an employer.

If you DO have access to a retirement plan, the income limit to get a full deduction is $103,000 or less.  If you DO NOT have access to a retirement plan but your spouse does, the income limit is $193,000.  When neither spouse has access to a retirement plan, there is no income limit.

Roth IRA income limits are more straightforward.  If your income is $193,000 or less, then you can get the full tax deduction.  This is up $4,000 from 2018. 

So if you happen to fall within these new income limits, rejoice!  You get to save some taxes.

 It’s important to know about these IRA upgrades, but it’s even more important to take action.  If you were already maxing out your IRA contribution for 2018, all you have to do is add $41.67 to your contribution per month to max it out in 2019.

If you’re not quite at the point of being able to max out your IRA, just try to increase your contribution as time goes on and your income increases.  

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