Growing up most of your environment is dictated by others and there is often a discrete and easy measuring stick to determine success. Did you get an A? An F? Who was fastest at the track meet? Are you on Dean’s List or not?
The employment world, especially at larger entities, is similar. Were you promoted according to the typical progression? What was your percentile rank this year and where did your manager score you on 1-5 Employee Achievement Scorecard? There’s a flow to the year that’s set and certain steps that occur on a schedule that is more-or-less standardized and consistent.
From birth through most of my twenties the above sort of metrics environment governed most of my world, outside of purely personal decisions. I did mostly well and it’s funny how a set scale of achievement can set your mind at ease. Got an A, maxed out the scale, mission accomplished, move on.
After leaving and becoming self-employed I’ve had to make a mind-shift that can be difficult. Being self-employed or running your own business doesn’t offer easy metrics to gauge and motivation and goals have to be self-set and self-driven. It’s also more apparent that the tidiness of a grading scale doesn’t really apply to most things. You might experience great growth and success but was it the top-level growth? Did you achieve in all areas or just some? How do you feel about those areas that you know you did not excel at, even if overall you’ve had success?
Sometimes I find the lack of specificity hard to deal with. There is no road map when you run the business, make the decisions, and there’s an infinite universe of options to take with finite resources and time. Even a smashing success – a 100% return in a year, for example – can feel in many ways like a failure. Another option was 150% and you didn’t take it. The overall outcome was good but just due to luck – it’s not repeatable and not due to your actions. Even if it was from your actions look at all the misses ensconced in that “win” – failing to optimize vendor agreements, substandard lending selection, below optimal revenue level. That 100% should easily have been 120% and you also lost future opportunities because of this performance miss.
These feelings are likely tied into the similarly messy and hard to grade role of being a parent. There is no strict guidebook for parenting and even if there was, it would be outdated quite quickly as the world changes and we must respond.
Man, it’s like Christmas today at the Anderson household. October 20 aka Annual Financial Update Day!
We gonna order some good food, hope the kids stay in bed, and review some Excel spreadsheets together as all happily married couples do.
Honestly, a day we really look forward to each year. A time to reflect on the progress of the past year, challenges, and goals for the upcoming year. I like doing this at the end of October because there’s also enough time before year end to address anything that needs taken care of – max out the Roth if we forgot, make some charitable contributions, maybe adjust the daily automatic investments, etc.
Our annual update is mostly two items:
Review Personal Financial Statement (PFS) – essentially a net worth statement, often requested by banks
Make some fun goals for the coming year – travel plans, family visits, stretch goals for work or money
You can add more items if you like, but this set up works well for us. A bit of a New Year in October with the setting in of fall weather. So much to enjoy.
Hope you can also celebrate AFU with your partner, or a friend. Cheers!
I’m fairly skeptical about cryptocurrencies, but as the market continues to grow (Bitcoin total market cap is approaching $1 trillion) I feel that I need to have some exposure and a better understanding of the potential and pitfalls.
I’ve listened to a few episodes of Animal Spirits with the head of BlockFi and found the premise of the platform interesting. [Here’s one of the episodes from 2020.] So I decided to dip my toe in the cryptoverse with some small weekly investments in Bitcoin, Ethereum, and DAI on BlockFi.
You purchase cryptocurrencies on the platform, and then earn a yield / interest rate on the holdings. The rates vary but currently range from 3.25% for Pax Gold to 9% for DAI. (I don’t even know what those coins are.) Bitcoin is the largest cryptocurrency and earns 4.5%. So by putting money in BlockFi you have exposure to the ups and downs of the value of the crypto you own, and also earn interest on the holdings. Additionally, they have a credit card with Bitcoin rewards which looks really cool but I probably won’t generally use since the reward rate is 1.5% – not bad but I mostly use my Capital One Spark cards at 2% cash back.
Sharing a couple of funds I’ve been investing in, as recent conversations have included this discussion.
I’m currently investing in a couple of funds focused on dividend yield. The funds are shown below, but I agree with the many articles that point out chasing dividend yield is dumb. In general I prefer a “total market” fund – like Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) – as long-term growth / appreciation is likely to be better than dividend funds that lean toward mature or potentially declining companies. I like the below dividend funds because of a personal preference for accessible dividend payouts, though this likely reduces the overall long-term return. I also enjoyed the perspective by Jeremy Jacobson of Go Curry Cracker on Episode 169 of the Meb Faber podcast – highlighting that absolute dividend payouts per share typically don’t fluctuate in the same way that stock values do. Essentially, values influence the stated yield on a percentage basis but the dollar amount dividends don’t usually change, at least for healthy companies.
1. Vanguard Total World Stock Index Fund Admiral Shares (VTWAX). Current yield is 5.19%, included in chart below. I have a bent toward international investments in general, given that most of our income and assets are tied to the U.S.
2. Vanguard High Dividend Yield ETF (VYM). Current yield is 2.96%, included in chart below.
With investing in general, a huge part of the equation is simply taking funds and putting them to work. Whether you invest in the above options, or other funds, or start a business, or other productive use matters far less that simply taking dollars away from spending and directing to investing. I like Vanguard in general for investing but also put money into real estate, businesses, private loans, and a variety of other productive uses. Take whatever path(s) suit you best, just make sure you are regularly making investments.
The term “Latte Factor” was popularized by David Bach in his best-selling book, The Automatic Millionaire. The concept highlights how small purchases everyday add up to big money over time – in this case exemplified by a daily $5 latte. It’s a specific example of how opportunity costs work. When you use your resources for one thing you are giving up alternative uses for that money. Per Webster Merriam the formal definition follows.
– the added cost of using resources (as for production or speculative investment) that is the difference between the actual value resulting from such use and that of an alternative (such as another use of the same resources or an investment of equal risk but greater return)
Bach’s book popularized the art of slamming Starbucks purchases as extravagances for spendthrift millennials that have no long-term financial sense. It’s a good concept, and the math works. If you take the $5 a day and instead put it into low-cost index funds or other investments the accumulation over time is enormous.
Here’s a July 2018 example post, using the $5 latte example, from US News. Over 50 years, $5 a day invested across the stock market would yield you an $800,000 portfolio balance. It’s a great, powerful example of how returns compounded over years can add up to big money. The big missing piece of getting these returns, however, rests upon actually investing the $5 a day. Opportunity costs only really matter if the alternative uses are uses that one will actually take. You may not like Starbucks at all so you never spend $5 a day on coffee, or you may have incredible willpower and forego your treasured cup of mocha java daily for years on end. Unless you take those individual $5 savings and everyday invest them you will not see the $800k pot of gold at the end of the 50-year rainbow. If the money sits in your checking account and is then used for a trip to Disneyland, or a shopping trip, or the monthly dozen streaming service bills it has not been saved, nor invested. It’s been spent on a different consumption use. Unless one is very diligent or budget-focused it is hard to monitor each dollar and actively redirect from spending to investing.
I had the Latte Factor in mind when I was considering how to be a better, more consistent investor about a year ago. It was shortly after the New Year and resolutions were on my mind. I decided to use the idea of the Latte Factor in reverse – by starting with investing and making a daily investment the priority. My thinking was that if I made the $5 investment a priority each day, and automated it I would be embracing the investing side of the Latte Factor which is the most important part. Getting your money to work for you is the goal, not self denial at the coffee counter. They are both part of the equation, flip sides of the coin, since we all deal with finite time and money. Although they are related, I view the investment side of the coin as more important than the saving side. And knowing myself, giving up my daily coffee just isn’t in the cards.
I used my existing Vanguard account to create a recurring weekly investment for each day of the week. (Since you can’t create an automatic investment on a weekend day I doubled up on a couple of week days to have 7 total investments a week.) Here’s my current latte investing setup – there’s an additional 8th weekly transfer to a money market fund as an emergency savings additional goal.
I’ve blanked out the amounts above as I don’t think it’s relevant and will depend on each person. For you, the $5 a day may be a great start. Perhaps you earn a lot more money than I and $500 a day would be a better fit. The important bit is to start, and automate, your investing so that you remove the need for active attention and willpower to ensure it happens. This is likely already the case if you have a 401k or other employer investment plan – you set it up once and rarely think about it again. Adding an investment plan for yourself individually can be a great complement and remind you that your financial future is ultimately in your hands, and needs to be on your mind.
In addition to the power of compounding, I’ve enjoyed the psychological element of having a daily investment habit. When I’m winding down at the end of the day I can tally a small win, every day, that even if I did go out for coffee, or dinner, or booked an expensive trip I was also investing for the long-term. That little bit of positive reinforcement and encouragement has been meaningful to me. My wife and I both set up our own daily investments in this vein. It’d be a bit cleaner and simpler to just lump the investment dollars together and do it once a day instead of twice. However, just as you can’t have another person eat well for you, or do your daily exercise routine I find it important for us each to be invested in the process and have a daily win.
Our first year of latte investing went well, and with the calendar turning over we took a few minutes to discuss and update our daily investments. Things have been going pretty well, so we were able to increase our daily amounts a bit. Maybe in the future we’ll need to decrease the amounts. Either way, I plan on continuing this daily habit to have our small daily money wins and to remind ourselves that everyday we are going to be investors. Hopefully, as the years go by, the returns will grow and our balances will accumulate.
I hope sharing this daily habit is helpful to you, and if you have ideas to share about building wealth for the long-term I’d love to hear them. Cheers.
So you want to operate a short-term rental for your vacation home, in-law flat, previous home, or other property? Sites like Airbnb and VRBO have made the idea of second home or investment property a reality for many. These sites make the marketing and management of a property much easier than in the past. However, there are a number of additional tools and considerations to take into account.
Here a few recommendations for getting your short-term rental up and running smoothly.
Open a Checking Account (and potentially Credit Card) – If you are running a rental property, you are operating a business and will need to report the earnings and expenses on your tax return. Open up a checking account at a minimum to make tracking your net income easier. You may also want to open a credit card to earn rewards or cash back, depending on the amount of activity you have.
Check (And Modify As Needed) Your Insurance Policy – You may need to get an additional or different insurance policy for the property. There are a number of insurance providers that offer policies for short-term rentals, I use Foremost. Additionally, you may want to add an umbrella policy or consider setting up an LLC to address liability exposure.
Utilize Additional Tools – I currently use the following add-on tools for my Airbnb listings.
BeyondPricing – This tool adjusts the nightly rate to account for prices in the area, occupancy rate, seasonal factors, etc. There are a number of similar tools but I’ve been happy with BeyondPricing. The company charges 1% of gross for the service but I’ve found that just being able to pick up higher rates for large events like Comic-Con or conventions pays for itself.
Smartbnb – I really like this tool for managing multiple properties and team members. You can set up automated messages for check-in, check-out, etc. You can also set up text reminders for your housekeeper, manager, or other service providers.
Utilize Service Providers – Depending on your situation and goals, it may be well worth it to hire a property manager for your short-term rental, especially if you don’t live in the area. Guests often need in-person assistance for various needs, repairs, or other reasons. You may also want to consider a housekeeper unless you’re typically in town and have a flexible schedule to clean yourself.
Hosting on Airbnb for over a decade has been a great financial help for my family. I hope these suggestions are helpful to you and if you’re looking for more specific advice please contact me and let me know. Cheers!
Raising children entails a lot of trial and error, and hoping that you aren’t screwing things up too much along the way. As our kids have gotten older we are moving into new subject areas, one of which is money. We want to expose our kids to good money habits while also giving them agency and discretion. Investing has been an area that has been going well so far so I wanted to share our experience with others in the same boat.
We set up an investment account at Betterment for each of the kids when they were born and have put in $25 a month since then. Now that the kids are old enough to be involved there is an account history and returns that we can go over together and learn together about expenses, how returns from appreciation and dividends work, and that there is risk involved in investing. Although we primarily use Vanguard for our own investments I like the aesthetics and diversification into multiple index funds / ETFs that Betterment makes more automatic – it seems to connect with the kids better and is more straightforward for them to understand.
[Note: We have chosen to hold the investment accounts for each of our children in our name so that we have control of the funds until we decide to give over full control. We’ve done this for reasons related to age and maturity, impact on college scholarships, and other considerations.]
Now when the kids receive some money for a birthday or we cash in the coins in their artisanal hand-crafted wooden banks we let them decide what to do with it – spend it, give it away, put in the bank, or invest in their Betterment account. It’s been fun and over the past year they’ve mostly chosen to invest their money, roughly 80% of their “earnings” going into their respective Betterment accounts. We sit with them at the computer but let them use the mouse, type in the contribution and notes, etc.
We’ll see how it goes in the future when there are more dollars at stake and more competing options vying for their attention and funds. From the early returns it’s been a simple and effective way to introduce investing for our family.
Employees often have the ability to contribute to an employer sponsored retirement plan (typically a 401(k) plan) – also known as a Traditional IRA. To contribute to this plan, the employee selects a percentage of income to contribute each pay period and this amount is taken out of their paycheck and sent directly to the plan administrator to be deposited in the individual’s IRA account. When contributing to a Traditional IRA no taxes are due at contribution. When the funds are distributed in the future, typically during retirement, income taxes will be due on the full amount distributed – both the earnings growth and the initial contributions.
Separately from a Traditional IRA, workers can on their own open and contribute to a Roth IRA (subject to income limitations). In 2019 an individual earning less than $122,000 can contribute up to $6,000 to a Roth IRA. With a Roth the individual pays taxes up front, when the money is earned, and then contributes the money after taxes have been paid. When funds are distributed in the future, typically during retirement, there are no taxes on the distributions.
Deciding between contributing to a Traditional IRA or a Roth IRA, or the relative amounts to each, is a frequent topic on personal finance blogs and talk shows. An important bit that doesn’t get enough coverage is this:
** Income Tax Rate Changes Are What Really Matters **
The are other factors to consider between these types of IRAs outside of tax treatment. A couple of factors, among others, include:
Employer contributions – Traditional IRAs often include employer-matching of employee contributions.
Liquidity – Ability to access contributions differ, with Roth contributions being accessible without penalty in some situations.
However, the biggest impact is made by the change in income tax rates between contribution and distribution. If tax rates are higher in the future at distribution, a Roth IRA is better – you paid at a lower rate when contributing and get to withdraw and avoid taxes at a higher rate. The converse is also true – lower rates at distribution favor a Traditional IRA. You avoid higher taxes at contribution and then they are applied at lower rates at distribution. Let’s repeat and then look at a few simple example calculations.
Higher income tax rates in future = Roth IRA better
Lower income tax rates in future = Traditional IRA better
If there are no changes in income tax rates, there’s no difference between the two types of IRA. Here’s a calculation example showing the net total distribution is the same if there are no changes in tax rates.
If tax rates are lower in the future than now (lower at distribution) then the Traditional IRA is better and yields a higher total distribution. Here’s the same example, with only the future tax rates decreasing.
If tax rates are higher in the future than now (higher at distribution) then the Roth IRA is better and yields a higher total distribution. Here’s the same scenario again, but with higher future tax rates.
There are two primary reasons for a change in income tax rates, both of which are difficult to predict over a long-term period.
Changes in Tax Law – changes to the rates and brackets in the IRS Code enacted by Congress
Changes in Income – changes in individual earnings resulting in a change in the applicable tax bracket (whether or not the tax brackets are changed by law)
Planning for the long-term is difficult but remember the impact that tax rate changes can have should be a prominent consideration.
Note: The content of this post is for informational and discussion purposes and is not financial or tax advice. Consult with an advisor before relying on this or any information.
One of my favorite websites is the fantastic Mr. Money Moustache (MMM). This website and the book Early Retirement Extreme (ERE) by Jacob Lund Fisker caught my attention a few years ago and the concept of financial independence has been stuck in my head ever since. There are a number of great podcasts, books, and articles, on the topic and the “FIRE” movement (financial independence / early retirement) has grown into a semi-mainstream concept.
The biggest lesson I took from MMM and ERE is the impact that a person’s savings rate has on the ability to grow wealth. The flip side to the savings rate is the consumption rate – together they equal 100% of earnings. The money you earn is either spent and disbursed to another party via consumption – the pizza place, daycare, car payments, etc. – or it is kept and accrued in your accounts – savings, investment account, real estate, etc.
The impact of the consumption / savings rate is laid out most excellently in this post from MMM:
I decided to take a stab at making a simple calculation along the same lines – using a few basic inputs to see the time required to create a “Passive Income Symbiote”. The goal is to create a passive stream of income equivalent to gross earnings – to entirely replace wage earnings with passive income. If you can live on what you currently earn then it’s easy to imagine living on that same amount, but with all of your time free to use as desired. I chose the word symbiote with the idea that the goal is to have the Passive Income Symbiote be the “host” and the person becomes the “parasite”, living on the efforts of the host.
The basic elements for the calculation (spreadsheet attached, feel free to use and share if you like) are:
Income / earnings – how much you make
Consumption rate – how much of your earnings you spend
Return on investments – what you earn on your savings
Earnings increase – if you expect an annual raise, how much it is
Earnings increase spent – how much of any earnings increase you spend (also known as lifestyle inflation)
Many of these factors are hard to change or controlled by outside forces – bosses, annual evaluations, how the stock market performs – the spending / saving ratio is the factor easiest to quickly adjust. It’s also the factor that has the most impact on the time required to fully fund a PI Symbiote. I’ve included some suggested ranges for items like return on investments and annual earnings increase. There’s a relative limit on some items and I’ve tried to based the suggested ranges on my perception of those general limits. (You might get a 100% raise at your job but it’s more likely to be a moderate increase of 3-5%, for example.)
Good luck on your journey and creating your own pet Symbiote. Cheers!
2017 marks the 6th Annual Ride for the River Park, benefiting the San Diego River Park Foundation (SDRPF). This 2 day, 1 night tour begins at the Pacific Ocean in the neighborhood of Ocean Beach, and follows the path of the San Diego River from the ocean to the headwaters in the mountains near Julian. This is a challenging ride of 70 miles each direction, with about a mile of elevation climb on the first day. At the end of the first day we’ll enjoy camping at Lake Cuyamaca and a beautiful night’s sleep. The return trip on Sunday, October 22 is all downhill – a well deserved easier return trip.
All participants are strongly encouraged to make a donation to the SDRPF at http://sandiegoriver.org/give.html. Please also send an email to organizer John Anderson at john.patrick.anderson.com. The event organizer and volunteers will provide snacks and water along the way and a support vehicle for carrying small overnight bags and gear. Food and drink are the responsibility of each participant as is accommodation in Julian on Saturday night. Julian is a popular tourist destination so reservations are recommended as soon as possible. There are a variety of hotels and other accommodations and many options on VRBO or Airbnb. There are also nice campgrounds nearby like Heise County Park and Lake Cuyamaca**. Please note that the campgrounds are a few miles from Nickel Beer Company where we will end the first day’s ride.
This ride is challenging and is on open roads, some with fast-moving automobile traffic. We welcome participants of all skill levels but please be aware that this will be a difficult ride for those not used to elevation gains or long-distance riding (more than 50 miles). Please note that the average group pace for the first day is 10 mph and 15 mph for the second day. If you’re not comfortable with this pace for a long day’s ride please bring a friend to ride along – we don’t want to leave anyone riding alone.
Starbucks Coffee – 10406 Friars Rd, San Diego, CA 92120 (Grantville)
7-11 – 10195 Riverford Rd, Lakeside, CA 92040 (Just before Highway 67)
Iron Mountain Trailhead / Parking Lot – Intersection of Highway 67 and Poway Road
Thai Time (Lunch Stop) – 2330 Main St, Ramona, CA 92065
Dudley’s Bakery / Santa Ysabel Grocery – 30218 California 78, Santa Ysabel, CA 92070
Lake Cuyamaca Campground (Finish Line!) – 15027 Highway 79, Julian, CA 92036. We’ll grill out for dinner, have some drinks at the lake and enjoy some star-gazing and conversation. I’ve reserved Campground 26 and 27 at the Chambers Park area, which has showers and nice restrooms. Capacity is 8 per site but there are additional spots that we can get the day of event if needed.
Day 2 Stops – Sunday, 10/22/2017
Breakfast – We’ll cook up some coffee and eggs and bacon at the campsite before heading off in the cool morning mist.
7-11 – 10195 Riverford Rd, Lakeside, CA 92040 (Just before Highway 67)
Mission Trails Visitors Center – 1 Father Junipero Serra Trail, San Diego, CA 92119
Finish Line – Pizza Port Ocean Beach – 1956 Bacon St, San Diego, CA 92107. All are welcome (non-riders included) to enjoy some pizza and conversation at Pizza Port at end of ride, estimated arrival time is 3:30 PM on Sunday, Oct 22.
Hope you can join us for this great event and even if you can’t enjoy the ride you can support the work of the SDRPF by learning more and making a tax-deductible donation at: http://sandiegoriver.org/give.html.