Category Archives: Pay Yourself First

Wealth Building and Dividends

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“Systems are the vehicles that are going to take you to your goals—your goals are simply the destination.” James Clear

“We don’t rise to the level of our goals; we fall to the level of our systems.  Don’t share with me your goals; share with me your systems.” James Clear

Are you prepared for your financial future and to build wealth? There are many benefits of investing for the long term and to building wealth. Here is a simple and straightforward checklist to get started:.

  • Start early!
  • Investing starts with a plan
  • Investment plan starts with defining and identifying your financial goals.
  • Create a savings and investment plan based on your goals.
  • Two primary goals must be creating an emergency fund and building wealth for retirement
  • Develop good financial habits
  • Pay off high-interest debt first.
  • Participate in your company’s 401(k) plan and max out any employer match.
  • Understand your risk tolerance.
  • Understand investment fees and their impact on returns.
  • Research all investments thoroughly.
  • Check your investments regularly and maintain a diversified portfolio.
  • Avoid investment opportunities that sound too good to be true.

40% of stock market returns come from dividends

It’s interesting that most investors don’t know how powerful stocks that pay dividends are. Dividend stocks are stocks of companies which pay out a portion of their earnings to the shareholder in the form of dividends. Between January 1926 and December 2004, 41% of the S&P 500’s total return owed not to the price appreciation of the stocks in the index, but to the dividends its companies paid out.

An additional benefit is that, under the current tax laws, qualified dividends are taxed at lower rate instead of your standard income bracket rate which translates into more money in your pocket.

Investors know that the best dividend stocks aren’t those with a high yield, but rather are quality businesses that can grow over time and pass along profits to shareholders through the dividend, by repurchasing shares and reinvesting in the business.

Bottomline is that dividend-paying stocks have outperformed in the past and that they have a good chance of doing so in the future. The secret is to reinvest those dividends, and put the power of compounding to work in your portfolio.

To build wealth, investors need to account for a range of significant, real-world challenges, including:

  • Longevity
  • Inflation and rising costs
  • Fixed income vs. equity valuations
  • Low yields

With tens of billions of dollars trading hands every day on the New York Stock Exchange alone, it’s easy to lose sight that when purchasing a stock investors are effectively purchasing ownership interest in a business. Assume for a moment that you don’t get a quote every day for your shares in that business and that you can’t sell your ownership interest for several decades. Your focus would likely shift from price to value.

And the value of that business, whether publicly traded or privately held, is the present value of all future cash flows. After all, what is the point in owning a business – or any investment – if you’re never going to receive any cash from it? When a company generates positive free cash flow, it has several options; the company can hold cash in reserve, fund organic growth, make acquisitions, pay down debt, or return it to shareholders through dividends or stock buybacks.

Using dividends to pay your expenses and allow you to reinvest to get more income. You can achieve this by investing in excellent dividend-paying securities now and letting those dividends reinvest as you work towards your retirement.

References:

  1. https://www.investor.gov/sites/investorgov/files/2019-03/OIEA_Financial_Capability%20Checklist.pdf
  2. https://www.fool.com/investing/dividends-income/2006/09/19/the-secret-of-dividends.aspx
  3. https://advisor.morganstanley.com/christopher.f.poch/documents/field/p/po/poch-christopher-francis/WhyDividendsMatter.pdf

Planning and Achieving Financial Freedom

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Financial freedom can be an elusive—and hard-to-define—goal.

Financial freedom is often said to be in the eye of the beholder. To some it may mean freedom of debt and being able to fund your lifestyle with your cash flow; to others it may mean early retirement on a Caribbean island. Whatever your financial goals or definition of financial freedom, there are ways and things you can learn to help you get your financial house in order.

Once you’ve decided that financial freedom is one of your top goals, you can start taking steps to achieve it. Thus, the first step toward achieving financial freedom is to define exactly what it means for you. You can’t generally achieve something that you haven’t defined. So, once you’ve defined what financial freedom means to you, you can start taking steps toward your goals.

“What then is freedom? The power to live as one wishes.” Marcus Tullius Cicero

Just because you have money does not mean you have financial freedom. There have been numerous people, especially professional athletes and entertainers, who have earned millions of dollars and subsequently lost it all through reckless spending and debilitating debt. Thus, even if you have a lot of money, if you don’t know how to manage and make your money work for you, it will more than likely disappear.

Financial freedom typically means having enough savings, financial assets, and cash on hand to afford the kind of life you desire for yourself and your families. It means growing savings and investments to a level that enables you to retire or pursue the career you want without being driven to earn a wage or salary each year. Financial freedom means your money and assets are working hard for you rather than the other way around…you’re working hard for your money.

In other words, financial freedom is about much more than just having money. It’s the freedom to be who you really are and do what you really want in life. It’s about following your passion, making choices that aren’t influenced by your bank account, net worth or cash flow, and living life on your terms.

Track your expenses

It’s difficult to know how to save money if you don’t have a good idea of where your money is going. Carefully track your spending habits for a typical month. Doing this will help you to become more conscious of your discretionary expenditures. It will also reinforce what expenses are essential and remind you to plan for unexpected expenditures, like medical emergencies and car repairs. Therefore, it is vital to understand and to know where your money is going.

Make a budget

Once you’ve taken inventory of your expenses, next step is to create a budget. While budgeting can sound like a cumbersome task, you may want to start by using a budgeting calculator to get a feel for how you are currently spending your money and how you’d like to change your spending.

One popular budgeting method is the 50/30/20 rule. The 50/30/20 rule is a way to divide your post-tax income based on your needs, wants and savings. The rule states that people should spend 50% of their income on their needs. This includes health insurance, housing, transportation, and groceries. Then, the guideline states that people should spend 30% of their income on wants or non-necessities such as entertainment, travel, and more. Finally, the last 20% of a person’s income should be saved or invested. This might include retirement savings and building a stock portfolio.

Once you have created a budget, don’t put it in a drawer and forget about it. Instead, make it a working and living document that you check and refer to often. Spend a half-hour per month reviewing how your actual expenses match your budget and make adjustments as necessary.

Automate your savings

Automating your savings and investing is one of the easiest steps you can take to ensure that you are on the path to financial freedom. You can set automated contributions to your employer-sponsored investments, including your 401(k) contributions and employee stock options.

When your savings and investing are automated, your money will continue to grow without you having to think about it. This will help you to reach your financial goals easily and quickly.

Have some percentage (10% to 20%) of your paycheck automatically deposited into a separate account—whether it’s a savings account, a 401(k) or an IRA. Money that isn’t easily accessible is not easily spent.

Unfortunately, many Americans are not saving enough to maintain their current standard of living during their retirement years. It was found that about 21% of Americans have nothing saved for retirement, according to the Northwestern Mutual’s 2018 Planning & Progress Study.

Start investing early

Follow the adage, the best time to start investing was twenty years ago; the second best time is today. You should start investing in a tax deferred account, preferably with your employer matching a portion or all of your contribution.

Planning for retirement is a marathon and not a sprint. Even if you are starting small, the most important thing is to get started. Therefore, it will likely take decades to reach your goal. Therefore, it is important to remember why you want to achieve financial freedom. Keeping your purpose, goals and the bigger picture in mind will help you navigate the day-to-day financial decisions.

Once you become financially free, you have more choices of how to live your life and spend your days.

When you decide that you want to start working toward financial freedom, it is important to remember that you will not become financially free overnight. However, according to certified financial planner David Rae, in a 2018 article in Forbes magazine, there are eight hierarchies of financial freedom that you can work towards:

  1. Level 1: Not Living Paycheck to Paycheck – The first level of financial freedom is building up an emergency fund and paying off any credit card debt. Unfortunately, living paycheck to paycheck is the reality of millions of Americans. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017, some 40% of households could not cover a $400 unexpected expense.
  2. Level 2: Enough Money to take a sabbatical from your work – Accumulating enough money to be able to take a break away from work can be rewarding. This does not mean you have to quit your job, but it sure is a good feeling to know you can.
  3. Level 3: Enough to be Financially Happy and still Save – it’s about enjoying your life and having the money to do it. There can be peace when you are earning enough to save, doing the things you enjoy and still having extra at the end of the month.
  4. Level 4: Freedom of Time – Many people desire more flexibility with their schedules. Freedom of time and financial independence go hand in hand. Together, they are about following your passion, or spending more time with family, and not going completely broke doing it.
  5. Level 5: Enough for a Basic Retirement – Think about what your bare minimum retirement would look like. By knowing your bare minimum retirement, and knowing that you have enough money saved to at least cover some standard of living in your retirement, will also influence other life choices you may make along the way.
  6. Level 6: Enough to Actually Retire Well – Knowing you are on track to accumulate a nest egg to support that lifestyle is a big win. Well done to those who have accumulated enough assets, or passive income streams, to be in a position to retire well.
  7. Level 7: Enough for Dream Retirement – It would feel great knowing that you are on track to have enough money to retire and be able to live your dream life. What is stopping you from getting there.
  8. Level 8: More Money Than You Could Ever Spend – Having more money than you expected to spend is great. Building enough wealth so that you could not possibly spend all of it is another.

Bottomline is that if you want to be financially free, if you want to be able to live the lifestyle of your choosing while responsibly managing your finances, you need to become a different person than you are today and let go of the financial mindset that has created your current financial predicament and has held you back in the past.

Attaining financial freedom, which means having enough savings, investments and cash flow to live as you desire, both now and in your later years, requires a continuous process of growth, learning and emotional strength. In other words, whatever has held you back and provided you comfort in the past or kept you less than who you really are will have to be replaced. You will have to become comfortable for awhile being uncomfortable. And in return, the financially empowered, purposeful, and successful you will emerge — like a butterfly shedding its cocoon.

References:

  1. https://www.richdad.com/what-is-financial-freedom
  2. https://smartasset.com/financial-advisor/financial-freedom
  3. https://www.forbes.com/sites/davidrae/2019/04/09/levels-of-financial-freedom

7 Investing Principles

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The fundamentals you need for investing success.  Charles Schwab & Co., Inc

1. Establish a financial plan based on your goals

  • Be realistic about your goals
  • Review your plan at least annually
  • Make changes as your life circumstances change

Successful planning can help propel your net worth. Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.

A financial plan can help you navigate major life events, like buying a new house.

2. Start saving and investing today

  • Maximize what you can afford to invest
  • Time in the market is key
  • Don’t try to time the markets—it’s nearly impossible.

It pays to invest early.  Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.

Don’t try to predict market highs and lows. 2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.

3. Build a diversified portfolio based on your tolerance for risk

  • Know your comfort level with temporary losses
  • Understand that asset classes behave differently
  • Don’t chase past performance

Colorful quilt chart showing why diversification makes long-term sense. The chart shows that it’s nearly impossible to predict which asset classes will perform best in any given year.

Asset classes perform differently. $100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

4. Minimize fees and taxes; eliminate debt

  • Markets are uncertain; fees are certain
  • Pay attention to net returns
  • Minimize taxes to maximize returns
  • Manage  and reduce debt

Fees can eat away at your returns. $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save roughly $13,000.

5. Build in protection against significant losses

  • Modest temporary losses are okay, but recovery from significant losses can take years
  • Use cash investments and bonds for diversification
  • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses

Diversify to manage risk. Investing too much in any single sector or asset class can result in major losses when markets are volatile.

6. Rebalance your portfolio regularly

  • Be disciplined about your tolerance for risk
  • Stay engaged with your investments
  • Understand that asset classes behave differently

Regular rebalancing helps keep your portfolio aligned with your risk tolerance. A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.

7. Ignore the noise

  • Press makes noise to sell advertising
  • Markets fluctuate
  • Stay focused on your plan

Progress toward your goal is more important than short-term performance. Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

References:

  1. https://www.schwab.com/investing-principles

Paying Yourself First

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“Don’t save what is left after spending; spend what is left after saving.” Warren Buffett

Automated saving and ‘paying yourself first’ are probably the top two things Americans can do to create wealth and financial security. Paying yourself first is often referred to as “the golden rule of personal finance.” Paying yourself first means saving before you do anything else with your paycheck, like paying bills, buying groceries, or shopping. You allocate a percentage of your pay or income to a savings or investment account. Paying yourself first prioritizes savings and investing, but not at the expense of necessary expenses like housing, utilities and insurance.

Too many people try to save in a way that’s exactly backward. They spend first and then attempt to save what left at the end of the month or save up toward the end of the year.

The far more powerful way to save and invest is to set aside a percentage of your income every pay period — recommended 15% to 20% or more — and to save and invest it automatically.

Accumulating Wealth

Most of the folks who have accumulated wealth got there by systematically socking away a reasonable percentage of their pay into a broad array of stocks and keep doing it for decades.

The key take-aways are to make your savings an automatic deposit so you don’t get a chance to change your mind and spend it. And, spend what’s left and you’re certain to be on the right path to build wealth for tomorrow. Additionally, don’t forget to invest it!

By saving first, you eliminate the problem of not having enough money to save at the end of the month. Setting up automatic deposit into savings or brokerage accounts, you can secure your financial future and build wealth.

“Why would you wake up in the morning, leave your family, not do what you want with your day, go to work all day long for 8, 9, 10 hours a day, commute back home, get up and do it all over again? Why would you do this 5 days a week, 4 weeks out of the month, 12 months out of the year? Why would you do all that to earn money and not pay yourself first?

Most people pay everyone else before themselves: the government, their creditors, and their bill collectors. Everybody else gets paid first and then if anything’s left over, then they pay themselves.

That system stinks and is designed for you to fail financially. If that’s the system you’re using right now, and you don’t have money, that’s why. The odds are set up against you. It’s too tough for you to get rich if you’re paying everybody else first. You need to change this.

You need to completely redirect your income so the first person who gets paid is you.” David Bach, The Automatic Millionaire

Prioritize savings

If you deposit money directly into savings or brokerage account every time you get paid, you may be less likely to spend it on your everyday expenses. Following this system can help you foster a habit of saving that will add up over time and help you be prepared for retirement or unexpected expenses.

A good target is to save 10 – 15% of your take-home pay and put it toward your savings and investment goals. Saving even $125 or $150 a month is one small step you can take to help you get into the habit.

“The first bill you pay each month should be to yourself.”

By paying yourself first, you make saving a top priority. You make it a priority to pay your savings and investment accounts first, before making the first monthly payment or paying the first bill.

Most people say they don’t save enough money for retirement, or invest enough, or save a big enough emergency fund, because they don’t have the money to save more. That’s why personal finance advice says that you should pay into those savings and brokerage accounts first. Treat it like a bill. Approach it the same way that you treat your phone bill or your electric bill.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Automate Your Savings

A quick way to begin paying yourself first is by setting up an automatic transfer to a savings or retirement account every time you receive a direct deposit, like a paycheck.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Paying yourself first makes saving money and investing in assets a priority without sacrificing other financial needs and obligations. No matter what your level of earning or responsibilities are, you can afford to pay yourself first with a few small changes.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

Most people wait and only save what’s left over after paying bills or spending on other discretionary items—that’s paying yourself last. Conversely, before you pay your bills, before you buy groceries, before you do anything else, set aside a portion of your income to save. Put the money into your 401(k), your Roth IRA, or your savings account.

“Paying yourself first should really be called investing in yourself first.”

Source:

  1. https://www.marketwatch.com/story/the-huge-financial-force-even-albert-einstein-missed-2019-12-10