Syed, Author at The Broke Professional

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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How to Lose Friends and Scare Away People

red stapler

Many people have read the popular book How to Win Friends and Influence People by Dale Carnegie.  This book came out way back in the 1930’s but is still read by many today.  This book can teach you how to effectively network and connect with people to form meaningful relationships, in both your personal and business interactions.

It’s one of those books that teach you new things every time you read it.

But this post is not about all that syrupy good stuff.  This post is about the exact opposite. I will share a guide that will make sure you stay unhappy and stuck in your dead end job for a very long time, or even lose your job altogether.

It outlines the steps you need to take to ensure that you can effectively alienate both your family and friends while being scorned by co-workers at the same time.  It’s a rare skill to be able to lose friends AND scare away people, but I’ll show you how it’s done.  (This is all sarcasm by the way. Well most of it)

1.  Be late.  For everything.  It is said that time stops for no one.  It’s time to prove them wrong.  There are many places and people that expect you to be on time.  Your boss and your clients.  Mom and dad.  Your spouse.  Even your kids may expect you to be on time so they’re not stranded in front of school in 20 degree weather.

What gives them the right?  Take your time wherever you go and in whatever you do.  Deadlines and panicked phone calls from your children can wait.  You have more important things to do.  Time is a limited resource, so keep as much of it for yourself as you can.  (Reality: Pick your kids up if needed.  Don’t make your wife wait.  Ever.)

2.  Networking is for dweebs.  Who has time to network when there are so many shows to watch on Netflix?  You love your current job, but not that much, so talking to others in your field and keeping current on your skills should be the last thing on your mind.

Besides, who wants to be one of those guys that’s always shaking hands with people and smiling?  Not this guy.  (Reality:  Yes, you should make sincere and strong relationships with those people in your industry who make more than you or know more than you.)

3.  ALWAYS pass the buck.  Don’t be the “go to” guy in your workplace.  People will be asking you to do all kinds of stuff that you frankly don’t feel like doing.

If a client asks you to do an urgent project, first try to convince them that it’s not really that urgent, and if that doesn’t work, ask them to give the project to what’s his name down the hall.  (Reality: Try to be indispensable to your clients and supervisors.  They’ll greatly appreciate it because they’ll have to do less work.)

4.  Read a lot less.  There is this perception out there that successful people read a lot.  While this may be true, it certainly doesn’t sound like fun.  Reading hundreds of pages of material relevant to your field will take the excitement out of everything else in life.

If you know so much about your area of expertise, where are you going to get the rush of possibly making a bad decision?  Leave the reading to the librarians.  (Reality: Keep current on your field by reading relevant blogs or journals.  You’ll at least know when your field will become obsolete.)

5.  React to EVERYTHING.  All those people you work with and those clients you serve are out to get you.  Whether it’s your bobbleheads, awesome desk chair or even your red Swingline stapler, the world wants to see you pay and take your things.

This is why it is very important to react to every little thing.  And react HARD.  Throw objects, swear loudly, storm out of the room and, ideally, all three at the same time.  Every little sideways glance and convoluted comment that could be about you needs to be addressed.  These people will not stop until you’re out on the street.  (Reality:  People don’t have time to worry about you so don’t go crazy about everything.  They’re too busy worrying about themselves.)

These are my top 5 ways of being an anti-Dale Carnegie.  I’m sure there are many, many other ways I could think of to lead you down the path of the social pariah, but all this typing is hurting my fingers.  If you would like to share your own ways of losing friends and scaring away people, please feel free to share in the comments.

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Is the Market Going to Crash Soon? Who Cares!!??

Update: Well that was a timely post.  Last week, the week of October 8 2018, saw the S&P 500 drop a little over 4%.  While not exactly bear market territory, the pundits are already out in force declaring the end of the bull market and to move your investments into “safe” stocks, such as ones that pay high dividends.  

If you’re investing for the long term, don’t do such a thing.  This past week could very well have been just a blip on the market and the rise could continue for 6 more months.  Or it very well could be the beginning of a bear market.  Either way, if you have a sound investment strategy that takes these ups and downs into account, just stay the course.  

But if the market volatility and decrease in your net worth is making you want to sell a bunch of your investment,s you might need to re-think your overall investment strategy.  Or just hold on for the ride!  

Read this post again.  You’ll thank me later.

This is going to be a quick public service announcement post.

Lately, I’ve been hearing a lot of talk in the media about how the market crash is coming and we need to panic.  The cover of the latest issue of Fortune magazine had a guy with a sign saying “The End is Near”.

I know these types of story lines and images are made to sell ad space and make publishers lots of money.  But here are two indisputable truths when it comes to long term investing:

The stock market WILL go down.

Most people, especially the financial media, look at a stock market decline as an abnormal event that requires you to make some snap investment decisions.  The fact is, market declines are expected and should be assumed when you make your investment plan.  Here is a chart of the historical performance of the S&P 500:

The starting value of the S&P was 250 in 1930.  The most recent valuation had the index at 2800.  That’s more than a 1,000% return.  Not too shabby.  But as you can see in the chart, there were many dips along the way.  It was a very bumpy ride and will most likely continue to be bumpy.

Corrections and recessions are to be expected.  Investors should not be surprised when they occur.

Indisputable truth #2:

For long term investors, market drops SHOULD NOT change behavior.

When there is a market drop or recession, you will see the pundits talk about where to “shelter” your investments.  The safety of bonds will be talked and written about.  And you will see people panic and do very stupid things with their money.  Especially with their retirement accounts.

Market drops should be expected during your investment journey.  If you’re investing in a 401K or IRA which you can’t touch until age 60, there is no reason a recession should spook you when you’re age 40.  If anything, a market drop might compel you to increase your contributions since stocks will be cheaper.

As long as you make a sound investment plan that takes market drops into account, your retirement accounts should be able to weather any recessions, which last 2 years on average.  Stay the course and keep contributing to increase your shares.

No, the end is not near after all.

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Start Tracking Your Net Worth to Reach Financial Freedom

This post contains affiliate links

Everyone has heard the stat about the high failure rate of New Year’s resolutions:

8% of New Year’s resolutions fail

80% fail by February

Greater than 90% failure rate

So if you’ve made a New Year’s resolution for 2018, your chances of achieving it look grim.

The two most common New Year’s resolution goals are health and money.  Which means that there are a lot of failed financial New Year’s resolutions year after year.

My thought is that many people make very vague resolutions.  Goals like “I need to save more” and “We need to spend less on eating out” sound very nice in theory.  But are very hard to put into practice.

Along with being too vague, many resolutions fail because we don’t have an understanding of where we are.  It’s a cliched example, but you need a destination and a starting point in order to have accurate directions.

Making vague resolutions is like picking out a destination without knowing where the starting point is.  So you have no way of knowing if the direction you’re taking is going towards your goal or completely away from it.

You need to know where you stand financially before you can make an effective goal, let alone reach that goal.  I feel the best way to find your financial starting point is not by seeing how much you have in your checking or savings account.  It’s not the equity you have in your home.  And it’s definitely not how flashy your car is.

The best way is finding your net worth.  With the technology available today, calculating your net worth is very simple.  If this is the only financial resolution you make this year, you will be much better off than you were last year.

Why Net Worth Matters

The net worth calculation is very simple:

Assets-Liabilities=Net Worth

There is always discussion about what is considered a liability or an asset.  Some people consider home value an asset.  Some people don’t consider home value since it takes a lot of work to get money out of a home.  The details are endless.

But in general, as asset is something that adds to your wealth while a liability is something that takes away from it.  Common assets include your checking and savings accounts and retirement accounts.  Liabilities include credit card debt and student loans.

So net worth is basically a snapshot of your financial health.  But just like any snapshot, one picture doesn’t tell the story.

A new medical school graduate has little in savings and hundreds of thousands in student loan debt.  That will give him a large negative net worth.  A high school student probably has some spending money but very few liabilities since he lives with his parents.  So he would have a slightly positive net worth.

Does that mean the high school student is more wealthy than the new doctor?  The answer is no because net worth should be used to measure your financial GROWTH rather than a static number that looks at your wealth.  In 10 years time, the new doctor will likely have a net worth light years ahead of the high school kid.

So the key to wealth creation is to grow your net worth over time and grow it quickly.

My Net Worth Tracking Strategy

(Above is a screenshot of the sleek Personal Capital dashboard.  It gives you a quick glance at your net worth)

There are so many different opinions about how often you should track your net worth.  Some say every month (some people even track it every day!).  While others say once a year is enough.  The key is to find a pace you’re comfortable with and keep it consistent.

Personally, I check my net worth every quarter.  I actually enjoy checking up on my accounts and seeing how they’ve changed.  It also allow me to make sure there’s no fraud or any funny business going on in any of my accounts.

And doing it quarterly is enough time to see if new strategies I’ve implemented are actually making a difference.  Plus, most companies operate in quarterly statements so there must be some wisdom in it.

As far as what high tech tools I use, an Excel spreadsheet and a Word document are my weapons of choice.  I use the Excel document to help me calculate my net worth and I record the values over time in my Word document.  Easy peasy.

But one piece of technology that helps check my work and give me more insight into my net worth and retirement is Personal Capital.  I’ve been using it for years to view my net worth and they have been getting better over time.

All you need to do is connect your various accounts and Personal Capital will monitor them.  They can’t make any transactions so there is no need to worry about security.  They simply monitor your account value and have your net worth displayed nicely in graph form.

Which is great since net worth growth is the true measure of financial wellness.  Physically seeing it as a graph really drives it home.

Other cool features of Personal Capital are the Investment Checkup and Retirement Fee analyzer tools.  They can analyze the holdings in your investment accounts and tell you where you may be over or underweight.  And they will also check the fees in your accounts so you can make sure you’re not paying too much.

And it’s all free.  There is an option to talk to a real financial adviser for a fee but that’s completely up to you.  Most of the powerful features of the program are no cost.

Conclusion

Deciding to grow your net worth is the best thing you can do to turn your financial life around.  Thinking in terms of net worth rather than just making and spending more money will allow you to see your finances in a whole new way.

Suddenly, paying a huge monthly bill for that fancy luxury car when a regular old Toyota will do just fine doesn’t seem that enticing.  A decision like that can keep your net worth from growing the way you would like.  Thinking in terms of net worth rather than just focusing on your checking account is the real way to get wealthy.

Tracking your net worth consistently with Personal Capital is an excellent way to start the journey towards real wealth.

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3 Steps From a Negative Net Worth to a Millionaire

Disclaimer:  This post contains affiliate links.

If you finish any kind of professional or graduate school, you’re most likely going to be worth less than you did before you started.  (Worth less, but not worthless!)

Unless you have very wealthy and generous parents who can afford to cover your tuition payments of $50-60K per year, you will probably have a negative net worth coming out of school.  Mainly because you will have student loan debt and not much else.

Getting out of undergrad without student loan debt is doable.  You can get some scholarships, go to an in state school and work a full time job along with your studies.  But graduate schools have much fewer scholarships, higher tuition and a large workload that will prevent most people from working full time.

A typical optometry school graduate will have about $150,000 in debt and minimal savings.  That’s a net worth of -$150,000 right out of school.   You are worth less than you were when you were a baby.

But all is not lost.  With a few critical moves, especially early on in your career, you can reach a net worth of a million dollars in a reasonable amount of time.  Why a million dollars?  I don’t know it just sounds awesome to say you have a million dollars.

Now that you have that shiny new degree, you have the ability to make consistent money and dig yourself out of that hole.  With tuition rates soaring and some industries paying less now than in the past, it can seem like a daunting task to become a millionaire.

But it can be done in a few easy steps.  Just like a Tastee recipe video.

Step 1:  DON’T go on a spending spree out of the gate!

This step is the most critical but also the easiest to forget.  Going from a monthly income of almost nothing to thousands of dollars almost instantaneously can be exhilarating.  You want to do so many things like go out to fancy dinners, get that car you’ve had your eye on for a year and finally get away from living with roommates.

Reigning in your spending after you graduate is absolutely key.  If you get a new car and house and go on a fancy vacation right out of school, you are setting yourself up for financial failure.  You will be getting used to a lifestyle in which you have to spend a certain amount instead of investing and paying off your student loans.

It’s also important to consider that right out of school, you are used to living pretty lean.  So it shouldn’t be a huge adjustment to not live like a baller.  I’m not saying don’t spend any of your newfound money.  Just don’t spend ALL of it.

You can give yourself a luxurious 20% pay raise from your student life and put the rest towards your student loans or investments.  If you do this for just a few years out of school, you will have built the financial muscles that will allow you to become a millionaire very quickly.

For doctors that finished school a few decades ago, this step probably wasn’t all that critical.  Student loan debt was manageable and you could afford to indulge in a few things out of school.  Getting a new luxury car right out of school was not a huge deal.

But times are different.  And unless you change you will become a paycheck to paycheck doctor.

Step 2:  Get your student loans in order.  And start getting rid of them.

I’ve written a lot about student loans and will continue to write about them as long as they continue to be a big problem for new graduates.  It can seem very overwhelming to see a 6 figure debt right out of school.  But the only way to get rid of it is to get your ducks in a row, find a strategy to attack them and just keep at it.

The first thing you want to do is refinance all of your private high rate student loans.  You probably have a decent credit score coming out of school (find out why here), so you should be able to get a better rate.

Click here to get refinance quotes with Credible.  If you end up getting approved by them, you will receive a $200 bonus.

Then you need to figure out if you need to refinance your federal loans as well.  Unless you’re aiming for public service loan forgiveness, you should probably refinance and get a lower interest rate.

After all this work refinancing your loans and getting great interest rates, you have actually done nothing to your debt.  Now comes the hard part: making the payments.  Decide when you want to be debt free.  I think 10 years is a reasonable amount of time since you also need to invest your money and let compounding interest do its thing.  But the bottom line is that making large and consistent payments is the only sure way to pay off student loans.  Refinancing and consolidating may sound nice, but debt payoff is the name of the game.

Some people hate debt and will want to be debt free in 5 years.  More power to you.  The key is to be aggressive and make consistently high payments.  This will also mean you probably will have to postpone that around the world vacation or the new house until you’re debt free.  So be it.  The longer debt has a hold on you the more it will squeeze out of your finances.  Getting rid of it sooner is almost always better.

Step 3:  Invest early and often.

One benefit of making a high income from a professional position such as a doctor or lawyer is that you can use your money to enjoy a very comfortable life.  But once you stop working, the money stops coming in.  And trouble will soon follow.  That’s why investing is important.  It allows you to make money work for you when you can’t, or have no desire, to work anymore

The other benefit of making a high professional income?  Being able to invest more than the average person.  This is important since most professionals don’t start working until a few years after the general population.  We’re already behind the curve when it comes to starting to invest so it’s extremely important to invest early in your career in order to let compound interest do its thing.

And please do not underestimate the effect of compounding interest.  The earlier you invest, the quicker your money will grow and the quicker you can retire.  Or make an around the world trip  Or whatever it is you want.  Investing gives you that choice.

Investing comes in many forms.  It can be buying mutual funds within an employer sponsored retirement account.  Or a Traditional or Roth IRA you open on your own and pick some stocks.  Or it can be in the form of rental properties that you buy and hold.  There are many options, so just pick the ones that interest you and pour your heart, soul and money into them.  Allow that money to grow so you’ll be able to handle anything life throws your way.  Or simply retire at age 50 if you feel like it.

Conclusion

So that’s really all it takes.  Live like a slightly richer student, start attacking your student loans and begin your investing career as early as possible.  It just comes down to these three steps.  Now there are nuances and details within these steps you will need to figure out on your own.

Things such as how much should you allocate to student loan payments and how much to investing?  How much house can you really afford?  When is a good time to have kids?  What is your risk tolerance when it comes to investing?

There is no one size fits all answer to these important questions.  But as long as you get the big things right, you can figure out the details along the way.

And then check your bank accounts to find you’re a millionaire!

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Don’t Fall for the Minimum Payment Scam

Don’t get trapped!

I’ve written a lot about credit cards and their many advantages.  Things like earning rewards, extended warranties, travel benefits and fraud protection just to name a few.  I wrote a post very recently about how credit cards are so much better than debit cards.

But credit cards can also be death to your finances.  If you don’t pay on time and in full, you will be subject to late fees and interest.  A LOT of interest.  Credit card interest rates are easily in the double digits.  And some cards can be in the 20% range.  There is no reason anyone should be paying this much interest.

And consumers know this.  Most adults know that not paying your credit card in full will lead to interest being charged to your balance.  Knowledge isn’t the problem.

The problem is that the credit card companies have made it palatable for consumers to carry a balance and be charged interest along the way.  The way they do this is by offering the “minimum payment.”

And it’s a complete scam that is designed to take money from consumers and turn it directly into profits for the credit card companies.

‘Til Debt Do Us Part

Here is a screenshot from one of my recent credit card bills:

Every credit card statement includes a message like this.  They are literally telling us that making the minimum is bad for our finances and showing us how bad it is.  In this case, the minimum payment was $25.  That’s such a reasonable amount why wouldn’t I take the credit card company up on this offer?

Because the interest rate on this card happens to be 15%, and it would take me 2 years to get out of debt.  And most people have multiple credit cards asking for a minimum payment.  And all of this assumes that you will never spend another cent on your card (which is why it’s called revolving debt by the way.  Debt is being paid off while new debt is being created).

So even with this warning from the credit card company itself, why do so many people just default to just paying the minimums on their cards?  Because it’s just easier.

We live in a monthly payment type of society.  And it just seems a lot cleaner to add your credit card minimum payment to your pile of monthly obligations.  Put it on auto pay along with the car loan, student loan and mortgage.  Just set it and forget it right?  But in this case, forgetting about all of that interest building up in the background will destroy your finances.

Credit Card Debt is an Emergency

There is no such thing as a free meal.  If you get a “free” meal, you will most likely be on the receiving end of a sales pitch.  Just eat, smile, nod and be on your way.

Paying off credit card debt is the closest thing to a financial free meal you can get.  Getting into credit card debt and paying 20% in interest month after month is not ideal.  A situation like that, which many families find themselves in unfortunately, will keep you in financial prison forever.

But once you realize this and commit yourself to getting rid of that debt, no other financial decision matters.  As high as credit card interest rates are, there is no investment out there that would justify you not getting rid of that debt as fast as possible.

If you’re paying 20% interest on a credit card, getting rid of that debt will be the equivalent of getting a 20% return on your money!  While avoiding the debt is a much better first step, paying it off ASAP is the next best thing.

That’s why I consider credit card debt an absolute emergency!  All discretionary spending such as new cars, vacations and fancy dinners out should be put on hold until the debt is gone.  It’s much easier said than done but it’s the only way you’re going to get out of financial hell.

The worst part is that credit card companies don’t want you to feel this.  They want you to feel comfortable shelling out 20% more money than you should each month.  The goal is for credit card debt to become the “new normal”.

But you know better than that.  Take care of credit card debt first and then focus on your other goals.  That’s the closest thing to a financial free lunch you will get.

Enrich Yourself, not Visa

Banks make a TON of money off of credit cards.  That’s why we will keep getting bombarded with credit card offers for as long as we live.

It’s actually pretty absurd.  Banks are simply offering a 30 day loan and charging an exorbitant amount of interest for it.  At least with an auto loan you can enjoy your car and get some use out of it.  But with credit card debt there is no collateral that you can really make use of.  Those fancy dinners out are just a memory at that point.

So don’t fall for the minimum payment scam.  There is no use for it except to keep consumers in debt for their entire life.  It’s all very sinister if you really think about it.  People become depressed and even commit suicide because of debt.  But as long as banks continue to profit off of credit cards, they couldn’t care less.

Free yourself and pay off your debt in full!

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How to Raise Your Credit Score FAST

Ride some coattails to a higher credit score!

Living off the grid sounds great.  You don’t have to field calls from telemarketers or keep up on with the latest Trump headline.  As long as you find a way to take care of hygiene once in a while, life will be good.

For those of us not looking to live in the wilderness with our family, a credit score becomes very important.  To get a house, car or education, you will need a loan at some point.  In order to get a loan, and then get a great interest rate on the loan, you will need a great credit score.

Many writers, including myself, have written about how to increase your credit score.  FICO, the people who assign your credit score, even have a nice graph that shows what factors affect your score the most.

As long as you make your payments on time and keep your credit utilization low, you should be good.

It can take years to build up a great score.  But what if you want to increase your score quickly?  And with almost no work needed?

There is a way to do just that by using a little feature all credit card issuers offer.  Enter the authorized user.

Authorized User Pros

Almost all credit card companies allow you to assign an authorized user (AU) to your account.  The primary card holder will sign them up, and it can be usually done online by entering some information about the AU.

Once the AU is approved, they get their own card with their name on it.  But all charges need to be paid by the primary card holder.  If the AU goes on a spending spree, the burden will still fall on the primary card holder.  So be very careful who you choose.

The AU does get a number of benefits:

1.  Credit score boost!  This is arguably the biggest benefit of being an AU.  If someone is young with no credit history or has a low credit score due to some past mistakes, becoming an AU can be a good option if the primary card holder has a great credit score.  Being an AU will put the primary card holders info on the AU’s credit report.

While nothing is guaranteed in the credit score boosting arena, if the primary card holder has a great score and a stellar credit history, the AU will almost always see a boost in their own credit score.  This can especially be helpful if one spouse has a great credit score and the other needs to build some credit.  Just add the spouse as an AU and watch their score skyrocket.

2.  Using a great credit card they would have otherwise not have been approved for.  Many people either have no credit or a low credit score.  This means they will likely not be approved for any of the awesome reward cards on the market.  Even though the primary card holder technically gets the rewards, if a family member is an AU it’s more points for everybody!

Having access to a great card such as the Chase Sapphire Preferred or American Express Platinum card has many additional benefits such as primary rental car insurance and travel benefits.  And with the associated credit boost that comes with being an AU, they might be able to get that great credit card on their ownat some point!

3.  Responsibility.  With a safety net.  A credit card is like a machete.  It is a tool that can be used to your benefit.  You can track all of your expenses in one place.  And you can earn some great rewards depending on what type of card you have.  Responsible credit card use has many benefits.

But it is also a tool that can harm you if not wielded properly.  Late payments and carrying a balance will dig you a financial hole real fast.  Double digit interest rates will quickly erase any gains from investments you may have.  And it’s really easy to get into credit card debt if you’re not careful.

Being an AU eliminates the risk of you getting into trouble with a credit card.  But only because the responsibility is on the primary card holder!  Hopefully, they are savvy enough to be able to erase your mistake and counsel the AU on not making them again.  This is a rare free pass in the financial world.

So the risk falls squarely on the primary card holder.  The AU is in the clear.  But if they’re not careful, the primary holder just has to make a call and tell the company to drop the AU.  So the risk is there, but can be minimized in an instant.

Big Upside with Little Risk

Adding an AU is an easy process that can be potentially beneficial for the AU.  It can provide a nice credit score boost if the primary card holder has a great score.  And the AU will get the benefits of using a credit card with potential rewards.

The risk falls on the primary card holder.  If the AU has a spending problem, the primary holder has to foot the bill.  Luckily, they can also cancel the AU in an instant.  So the risk is relatively small.

So to summarize, you CAN increase your credit score pretty quickly if you become an AU with someone that has a great score.  A lot will still depend on your own credit activity, but if you make it a point to pay your bills on time and not over utilize your credit, signing up as an AU can provide a nice credit score boost.

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