Tag Archives: books

Inflation: What it is and How to Use It

Inflation has essentially been around since currency was created. But what is it? The Marriam Webster dictionary defines inflation as:

“a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. That’s nice to know but how does this effect us in our daily lives?

Well the “rise in the general price level” can mean things like groceries, fast-food, restaurants, as well as other things like insurance, utilities and housing (both for buyers and renters).

With this cost increase usually happening year over year, what are some things we can do to minimize this?

Well the first big thing is planning. If you are considering retirement in a decade, realize that the cost to live then will be higher than the cost to live now. Do a rough calculation on the average rate of inflation (roughly 3.5%). Over ten years the cost of everything will most likely rise 41%!

After understanding the impact of inflation and incorporating it into your estimated retirement costs, it’s time to talk about investing. The best types of investments for inflationary periods are stocks and real estate. The reason for this is because stocks’ value (in the long-term)is based on the earnings of the company and earnings generally go up with inflation. So off the bat you have a built in inflation protector.

The second ideal investment, real estate, is a little more complicated to invest in. A common “investment” people choose to make is in their home. While it is certainly the case that homes usually go up in value, the decision isn’t a clearcut one. (Check out my blog on the rent vs buy debate)

Another way to invest in real estate is to buy rentals. This is more hands on and therefore takes more time and energy. If you are comfortable with this then by all means go forth and invest! However a lot of people find the intensive commitment inherent in this type of real estate investing too much to handle.

If this is the case with you you can consider another options, REIT’s. Real Estate Investment Trusts, or REIT’s as they are called, involve the investment of large groups who buy large quantities of real estate. The earnings and appreciation from this real estate is owned through a large quantity of shareholders who buy part of the ownership, like a stock.

While this is certainly an option, I find REIT’s to be remarkably unimpressive long-term compared to stocks or direct real estate investments.

Whichever path you choose to take, be wary of the inflation hurdles and the best ways to overcome them.

Combining Your Passion and Values With Income

Often when students or even middle-aged employees are considering which career path to choose they run into a dilemma. “Should I choose a greater income or sacrifice money to do the things I love?” many ask themselves. Even as a college student I have met and spoken with many older folks who find themselves still in a situation of questions.

Countless people go through their life without truly finding something that is both enjoyable and lucrative (or at least enough to pay the bills). Most people have heard of the classic situation of an artist or writer who lives in their parents basement. But what about the countless others out there who are in similar, yet less extreme situations?

Teachers a good example of this. Many of them make just enough to pay the bills, yet work long hours and stressful lives. Assuming they are doing something they enjoy (which I believe many of them are), how do teachers continue to do what they love while keeping the financial strain at a minimum?

There’s no easy answer to this question. I’m going to simplify a process I have used in my own life (before even exiting college) that has allowed me to understand myself better going into my “working years”. If your financial situation isn’t stable, you may have to work a J-O-B while you get these questions figured out.

1. What do you value?

Ask yourself, if you had only 24 hours to live, what people, places and activities would you care about? What would make your last 24 hours feel “full”? The answer to this can be revealing. As soon as you have grasped the things that matter most to you, begin looking at the things you want to pursue that match those values….

2. What do you love to do?

Everyone likes to do something. Maybe you love math. Or maybe writing or reading are your favorite. Or maybe science has always been a blast. There are numbers things you could find enjoyable. Find some of the top things and list them.

3. What are you good at?

This can be hard to know just looking at yourself. It may take honest questions with people who know you well to pinpoint what you’re good at. Maybe you are a eloquent or articulate writer. Or maybe you can organize things efficiently and effectively. Or maybe you are a natural leader. Or maybe you always have found analyzing numbers and facts easy. Whatever thing(s) you find stand out, those are some things you should double down on.

With these three questions answered you now have set the parameters. Your values dictate where you will never work. For example if you value family, your probably won’t work for a drug gang that breaks up families. Or if you value moral integrity, you probably won’t become a jail robber, even if your greatest skill is stealth and deception.

With values as your parameter, your passions are the arrow, pointing you towards a career field. Lastly your abilities and talents are the final part of the puzzle in determining what position best suites you.

For example what if you value family. You’re also highly interested in personal finance. As you become interested in the subject, you realize that you’re best at analyzing data and making good decisions. Upon looking at these three angles you will determine that becoming a personal financial planner suites you best!

I used the example of myself but you can use these questions for any situation or interest. Overall, these questions are simple, but they may take time to answer completely. And as if often the case, they may lead somewhere that doesn’t pay well. In that case you can either work somewhere on the side, take a pay cut or continue looking for that thing that is both fulfilling and pays the bills. Good luck in your journey!

3 Forces Standing Between You and Your Financial Goals

Time

Often all the things we want to accomplish aren’t feasibly achievable in a set period of time. When this is true, we have to make the often difficult decision of determining which path matches with our values. In other words, we probably can’t achieve every goal we have so we have to prioritize.

This is very true with short term goals like making it to your kid’s basketball game verses watching the football game live. But it can also be true with long term goals. For example I certainly would enjoy the process of being a masterful accountant who has both technical skills and people skills. However I have come to realize that I might never become the world’s greatest accountant if I have other goals more worthwhile (for example like becoming a great financial advisor).

Goals

You might think a strange thing to add to this list is goals. After all, aren’t goals things that empower us and keep us on track? Yes and no. In one sense goals are essential to producing the results we want in life. In another sense, goals by themselves, without effective plans to get there and way to streamline actions towards them, are meaningless.

As Warren Buffet and Bill Gates agreed in an interview: one of the greatest factors to success is focus. Putting all your energy on one task, both with your mind and body, is a powerful thing.

Having too many goals, I have found, can get in the way of this powerful focus. That’s why it’s so important to recognize the things that are worthwhile and the things that can wait.

Inflation

Lastly on this simple list of 3 is inflation. This is more of a technical obstacle than a mental one. However the force can be equally important. If you were to buy a house in a stable neighborhood today, do you think the same house would be worth more in 30 years? Yes, I would hope so. This fact that we can all bet on, the fact that prices will overall rise year after year, is called inflation.

Inflation is powerful because it covers both the consumption side (for example like purchasing gum) and the investment side like stocks or investment real estate. Inflation is such an important force that I will be covering a brief history and action steps around it tomorrow in my blog. Tune in!

When Should You Sell Stocks?

The old saying, “buy low and sell high” is a very noble goal to have as an equity investor. And during times of extreme prosperity, when the stock market is regularly reaching all time highs, it can seem easy to turn a little into a lot. However, most of the time, history has shown, investors get the timing wrong.

I made this mistake as well in my own life. When I was 16 or 17 I got $100 for Christmas along with a brokerage account, in my parents name, that I was allowed to trade with. After adding $10 of my own I opened it with $110 of fresh money to invest. I was excited!

My first trade, which wasn’t really researched, was the Walt Disney Company. The first month or so it went up. I became so elated as it continued to climb that after I took a “brief” fall I panicked. I told myself, “You’ve got to think long-term.”

So I didn’t sell. As the stock continued to fall gradually I continued to tell myself it would rebound eventually. At some point I caved and sold the stock, regrettably at a $5 loss. After this I purchased a Vanguard real estate ETF along with two shares of GE, which had recently been plummeting.

I have held onto these stocks for a while now and they have finally rebounded back to around $110 in value where I started. The real bummer though, is what the Disney stock has been doing. After I sold, it dropped a little more and then has continued to rise to around $117 per share.

If I had just held on I’d be $7 richer!

This silly little example shows that investing isn’t a day-by-day or even a month-by-month game. It’s a long-term play. When you buy a stock you’ve got to be willing for it to go down temporarily and eventually rebound. The important thing is making sure the fundamentals of the business are strong and then buying at a discounted price.

So, when exactly should you sell a stock?

You should sell when the stock is overpriced. And when is that? When the value you place on the overall business is significantly lower than the value the market is placing on it. That’s when you should run.

 

Investing in Gold: Should You do It?

There are usually two camps to the gold issue. One group says that gold has always been a medium of exchange and that, as a physical resource, the demand for gold will never go away. The second group argues that gold isn’t really worth much except what people are going to pay for it. It just sits there, collecting dust, not producing income or ROI.

So which is it? Is gold a legitimate investment or should we consider it a gamble? Well first let’s look at a brief (very brief) history of gold and how it has been used.

For thousands of years gold has been seen as a valuable resource. The ancient greeks at around 700 B.C. valued it enough to issue the first gold coins. This was under the reign of King Croesus of Mermnadae, who was a ruler of Lydia. They formed coins using a mixture of gold and silver that is called electrum.

As time progressed, more and more civilizations recognized the value of gold as a medium of exchange. For example the use of gold spread to Asia Minor as well as Egypt. The next big champion of gold were the Romans. They developed more technology that helped mine it in their vast empire.

As China and Indian economies developed, they began trading their valuables like silk and spices to the western countries for gold and silver. Gold continued to be used by civilizations for trade. It was always seen as a “precious metal.”

Fast forward a bit and we come to the early U.S.. The largest advancement in the case for gold occurred in 1792 when the U.S. adapted gold and silver as our currency standard. For decades after the U.S. used these two forms as money until paper currency was adapted in the United States. However even when we adapted paper, the backing behind it continued to be gold.

Eventually in the late 20th century, the gold standard was ended and fiat money took over as the form of currency for our country. Ever since gold’s price has moved up and down with demand and supply.

So, has it been a good investment?

The answer depends on what time frame you look at. For example after the crash of 08 and 09 gold skyrocketed in price. However recently the price has been dwindling. Overall, since we went off the gold standard, gold has gone up around 3% per year. How does that compare to stocks? Pretty poorly. Stocks have produced around a 6% return above inflation during that period.

So, does gold have any place in a portfolio? The answer is maybe. Looking at how modern successful investors view this resource, we can see that gold is best used as a small percentage of any portfolio. It can balance out times of panic when the stock markets plummet. Ray Dalio, a successful hedge fund manager and billionaire, has invested in gold only as a small portion of his overall investments.

Finally, the choice is really up to you. Talk to your investment advisor and do some research on your own. You may find that a 10% allocation of gold can significantly reduce the risk for your retirement account. Or maybe you decide not to because you realize you can produce better returns without it. Either way, don’t consider gold a true investment for any meaningful percentage of your investments.

The Most Advantaged Retirement Account

When it comes to picking a place to keep your retirement savings, there are two basic types of accounts to be aware of. The first is what is called a taxable account. This simply means the growth is taxed like most other investments. The second type of account is what is called tax-advantaged. In other words, this account has tax advantages like either  tax free or tax deferred growth.

In the category of tax advantaged accounts, there are a few popular names. Names like 401K and IRA are often used. When setting up a retirement account you can either set one up through your employer, or independently through a broker.

The types of accounts usually provided through an employer are 401K’s and 403B’s. Essentially these accounts are the same, but talk to your tax advisor about the differences and what applies to your specific situation.

If you decide to take the route of setting up a retirement account on your own, you can set up what’s called an IRA  (individual retirement account). IRA rules, for this current year, allow you to put up to $5500 of income away, tax deferred. In other words, you can avoid paying taxes on $5500 of income this year.

So the major employer-sponsored plans are 401K’s and 403B’s. The major independently funded retirement accounts are IRA’s. Within these options there is what’s know as a Roth. Whether it is a Roth 401K or a Roth IRA, the Roth has a few characteristics:

  1. Instead of deferring taxes upfront (and deducting the contribution from your taxable income) you pay taxes from the start.
  2. Instead of paying taxes on the growth, you avoid paying taxes in the future if it is taken out after 59.5.

In other words, Roth accounts are different in the fact that you pay taxes up front, but avoid paying it in the future if all the requirements are met. In recent years, the Roth has become more popular for these reasons.

Generally speaking, the Roth is better than the conventional account because of the power of “tax free” withdraws”. There are a few other types of accounts, but for most people, some form of IRA or 401K is the best option. I hope this helps on your retirement journey, whether you’re starting out, or in the midst of major changes.

Renting Vs Buying – 4 Factors to Look At

Most people will spend the largest percentage of their income on housing. Deciding what kind of housing, and how much can be the most crucial financial decision you’ll make. Choosing between renting or buying can literally be the difference between retiring in the next decade or not.

I am going to cover the largest factors that determine which option is better. In a later post I will outline what my math and research has shown, and which options work best for which situations.

Time-frame

For the vast majority of cases, the rent vs buy scenario comes down to timing. If, for example, you plan on moving in the next few years, renting is almost always better because of the closing costs associated with buying. However as we begin to look at longer time horizons, renting generally becomes more and more expensive, relatively speaking.

Location

In certain locations, like San Fransisco for example, it makes proportionally more sense to rent than it does to buy over shorter periods of time. This is due to the fact that there lies what I call a “Cali Premium” for people who buy real estate in any of the large metropolitan areas along the California coast. Because of this higher pricing, the cost to rent is comparatively lower than most areas of the country.

Discipline

The numbers only make sense if the person doing the renting is investing the difference (assuming there is a difference between renting and owning) consistently. If someone simply rents over buying, the numbers skew back in favor of the homebuyer, who has automatically enrolled in a “forced savings plan.”

The Numbers

The last major factor to look at is the actual numbers and data. These are questions like, what is the interest rate on the loan, what is my rate of return on my investments, how fast does my property increase in value, and how fast does the rent rise year-over-year? These four questions are some of the most impactful when it comes to analyzing the numbers, but there are a host of others to ask as well.

Hopefully these insights are beneficial when making these important decisions. I looking forward to seeing how the actual numbers pan out in real life in the years to come.

3 Factors to Look at When Determining Where to Live

As a financial blog, I have dealt a lot with individual personal finance issues, like what to invest in, how to budget, and what to do in different areas financially. Here I want to step back and cover 3 financial factors that you should think about when considering a city to live in. While these three aren’t the only things to think about, they certainly will cover the broad range of financial determining factors:

Job and Career Potential

Here you’re just trying to get an idea as to how easy or hard it will be to have employment, and sustain employment in your chosen career field. Two of the things to consider are the unemployment rate, which is a good indicator of how many people who want jobs have them, and job growth. With job growth you want to look at the number of new jobs being created, specifically in your career field, over the last decade.

Cost of Living

Housing costs will be broken down into to two big areas: housing and everything else. When looking at housing, there are usually two broad options available. You can either rent or you can buy. You are going to want to compare the costs of rent vs the rest of the country. Pay special attention to the rent increases. For example maybe your area currently has slightly higher rents than the national average, but over the last couple years the rents have been skyrocketing. You want to be mindful of areas in which the costs of living, including rents are rising quickly.

The second housing option to look at is homeownership. What is the average costs of a home in the area. This can vary greatly from one neighborhood to another. For example one neighborhood might costs $300,000 but just across the road might be $250,000 for a similar house. Find the area you’re thinking about and start comparing prices.

After paying for housing there are the rest of the general costs associated with living and breathing. These costs can include food, insurance, transportation, recreation, and especially taxes. Taxes are a huge part of your yearly expenses. There are income taxes (both federal, state and sometimes city), as well as sales tax and property tax. Look at these rates for you area.

Long-Term Stability

The last thing you want to look at after job potential and cost of living is the general stability in the area. The stability of the area is both the economic factors and the political factors.

For example look at one of the leading factors of growth for cities: population growth. Take a look at the recent trend in population. For example are massive amounts of people entering or leaving the area? This might be a sign that things are changing. With the change in demographics and population comes changes in political preferences.

Maybe these changes will lead to political leadership upheaval in the local government. Think about how these changes could potentially impact your life in terms of local taxes, regulations, social programs, and building projects in the future. Are you okay with these potential changes and the uncertainty that comes with them?

Conclusion:

Overall, these three factors can paint a pretty clear picture of the financial concerns about one area over another. After going through them, you should know whether this area is something you would want to consider moving to. Naturally though, there will be others things of concern, like climate, education, health and other issues. While these concerns might not directly impact your finances, most of them should be looked at closely for the effects they could have down the road.

2 Things I learned from Ray Dalio’s Book

While often seen on TV and financial journals, Ray Dalio is somewhat of an unheard of figure outside of the financial world. He started broke, developed his skills, knowledge and habits, and today is the billionaire funder of the largest Hedge fund in the world.

In his new book, Principles, Dalio focuses on the principles or set of beliefs that have been the baseline of his success in both life and business. Throughout the chapters he illustrates just how crucial principles are, not matter the principles, to how you perform in each area of your life.

From his book I have taken 2 main points:

1. The things we do know are much smaller than the things we don’t know

While everyone would say they believe this idea in theory, when it comes to the actions we take, many of us, including myself, will puff up our egos higher than is actually the case.

Dailo states that people who have more knowledge, success and experience on a topic, should carry more weight in our decision-making.

2. Set up systems, or processes that help make decisions and see around emotions

While emotions are a natural and good part of life and human interactions, when it comes to making the best decisions, especially the business decisions, logic should be the ultimate decision maker.

Two of the greatest roadblocks to making quality decisions are the ego and the blind-spot barriers, which are both covered by the entrepreneur’s planet in their post: https://wordpress.com/read/blogs/150799291/posts/16

Ultimately being committed to integrity, open-mindedness, and self-improvement, are the largest factors that have contributed to Ray Dalio’s success and the principles he teaches.

 

R.E. Strategies: Investing Debt Free Vs. Leveraging Properties

When making financial plans there are two basic schools of thought to get your information from. One group says that debt is bad, and that you should limit or eliminate all debt as soon as possible. The other group argues that getting rid of consumer debt is wise, but that borrowing money to buy investment properties or start businesses can be a smart investment.

Who do you listen to? The answer is that it depends. For example let’s look at the debt approach.

If your strategy is to purchase single family homes at favorable mortgage terms, receive monthly cashflow, grow equity and increase the value of the property over time then this strategy may work. However the alternative, no-debt strategy would leave you saving up and purchasing the whole investment with cash. Sound difficult? You bet!

So which strategy is better? Well that depends on which provides a better, risk-reward ratio. The following are a few risks we should be aware of when investing in real estate: Law suit risk, credit risk(that we won’t be able to pay the mortgage, thus losing the property), cashflow risk (that costs will rise to the point where we don’t receive adequate cashflow). These are just a few risks.

Of these three risks, which ones are effected by taking out a loan? Credit risk and cashflow risk are both effected. Credit risk isn’t even a concern with the no-debt approach(because there’s no mortgage) and cashflow risk increases with the debt approach because there’s increased monthly expenses in the form of loan payments.

A different risk we haven’t discussed yet is the risk of loss of capital. For example let’s say you make the investment in a limited liability entity and are thus only able to lose the money you have into the deal. With the all-cash approach your risk is much higher than the debt approach.

Overall the risks of using debt are slightly higher. However in terms of returns the returns can potentially be much higher than if you only use cash. In addition, purchasing a property with cash takes longer to save up for , lengthening the time it takes to make the original investment in the first place.

So which is better? It all comes down to if you are willing to take slightly more risks to potentially make much more ROI. As long as you are sure to never borrow more than 80% of the value of a property, the debt approach will usually work slightly better. Lastly, the most important takeaway is that simply investing is the most important step. So stop waiting and start taking steps towards financial freedom today!