Advanced Investing - Options - Part 2 - Selling Puts

Welcome.

Here's where investing starts to become a lot more fun.

This is where you start to pad your account with 'extra' money.

100 shares of a stock is called a "round lot."
200 shares would be two round lots.  300 shares, three round lots.

Round lots are really the only amount that professional investors will take a position with.

There's a reason why that is.  

Options.

Options are contracts that trade in the stock market just like regular stocks do.  

Each option contract controls 100 shares of stock.  

Well, here's a cool thing you can do that is different from the strategy of Selling Covered Calls.

It's called Selling a Put.

This is a fantastic strategy which will allow you to be paid to buy stocks at a discount.
Does that sound as good to you as it does to me!  Yes!
Obviously, that's a better way to invest - so lets Advance to Greater and start doing it.

Here's the idea behind selling a Put.

Think about a nice house on a nice street.
Imagine you live there and you like it so well that you'd like to buy the house across the street for your child to live in, and you just noticed that the house has a new FOR SALE sign out front.

Imagine walking across the street to talk to the owner and you find out that they want to sell the house for $300,000.  Now, you think to yourself, that you know the house is a nice house, and you know that you'd like to have it, but you think $300k is a bit more than you want to pay.
You think $250,000 is a good price.

(here's the magic)
So, you create a contract with the seller, but on these terms:

The seller agrees to pay you $10,000 now which you get to keep no matter what.
In exchange for that payment, you agree to buy the house for $250,000, if the seller can't sell it for more than that within two months.
After two months, the contract between you and the seller expires.

That's it.

Now think about this deal.
You have agreed to buy the house for the discounted price that you thought, ahead of time, would be a fair price.
You got paid to make that deal.
You have two months to wait to see if you get the house for the discounted price.
Either way, you have an extra $10,000 in your account!


Let's think about why the seller would agree to this.
As soon as they have that contract with you, they know that they have a minimum price that they're going to be able to sell the house for within two months.
So its like insurance for their sale of their house.  Perhaps they want that insurance because their employer is making them move by that date.  Or perhaps they're worried that the housing market will tank, right while they're trying to sell their house.
To the seller, this Put contract is an insurance policy.  One which they are happy to pay for.



This is also the basic premise behind the option strategy of Selling Puts.

There are people out there who want a little insurance for the stocks in their portfolios.
As such, they are willing to pay for that insurance.

Stocks that are very safe will have very small insurance premiums.
Stocks that are very, very risky will have much larger premiums.

When the price of a particular stock is trending higher and everyone knows its a good stock to buy, insurance premiums will be small.

When the price of a particular stock is falling and people are unsure how far it might fall, insurance premiums will be large.

The important thing is - you only sell Puts on stocks that you'd love to own, and at prices you'd be happy to pay.
If you want to get fancy, only sell Puts when the price of a stock you want is trending lower.
That way, the premium you will take in up front will be larger.


I'm using Intel in this example, because it is such a great company, with such a dominant market position.  Intel makes the computer chips that are inside most computers.  Ask yourself, will there be more computer chips in the future, or less?  More, obviously.

As of this writing, Intel is trading at $36.44 per share.  That's an okay price.  It's fair.

But we want to pay less.
Let's say we're willing to buy it for $35 per share.


So, we go over to where it says Option chain and click there.

Now, what we will see is:

First let's change the expiration date of the contract to go out a couple of months from now and look at the contract that we're interested in:

So, for selling this Put contract, we can expect to receive anywhere between $0.84 to $0.87 per share - but contracts cover 100 shares each, so its really $84 and $87 per contract in our account.

For the simplicity of this example, let's say that you were able to sell your contract for $0.86 per share ($86 per contract).

Just for being willing to buy 100 shares of Intel at a price that we'd be happy to pay ($35 per share or $3,500 per contract), and being willing to wait a couple months, we get paid!  Its awesome.

The expiration date of the contract determines what will happen to the shares after the market closes on that date.  Here's how it's figured out:

If, on November 18, 2016 Intel closes for $35.01 or more, nothing happens.   The contract simply expires and you might choose to sell another contract - again choosing a strike price that you would be happy to pay and an expiration date you prefer.

If on November 18, 2016 Intel closes at $35.00 or less, $3,500 will be withdrawn from your account over the weekend for each contract you sold and you will receive 100 shares of Intel for each contract you sold.  Your real price for those shares, though, will be $34.14    

that is $0.86 per share less than $35.

That's it, those are the only two possible outcomes.  

In one case you get paid to wait.  

In the other case you get paid to buy shares of a company you want to own at a price you are happy to pay.

Easy-peasy.  

Now, of course you can't trade stocks through Google Finance or Yahoo Finance - you have to use your own broker.

Each broker has its own way of doing things, but in my experience, its pretty darned easy to do this.
If you need help your first time, there are usually very helpful people at your broker's support center that you can reach out to for help.  Once you do it a time or two, its easy.

I'll show you how it looks in Interactive Brokers.  Other brokers will be similar.
Here's how you select the contract.

And here's what the order looks like - all you have to do is click submit.

Select Sell.

Input the desired number of contracts to trade (remember one contract covers 100 shares!)

Select which expiration date.

Select which price - I suggest putting in about what the market is trading them for (within a penny or so) 

Make sure the order type is a "Limit Order" - on Interactive Brokers that is "LMT".

Look everything over carefully to make sure its right...

then click Submit Order.

Done.

Relax.

But what's the catch?

Simple, most brokers have rules for who they will allow to sell these contracts.

For most people, you simply have to fill out a form on their website and submit it.

Then, they will approve you for either:

"Cash-covered puts" - where you have to have the full $3,500 set aside for the duration of the Put contract .... or,

"Naked puts" - where you have to set aside some portion of the $3,500 as a good faith deposit on the contract.

That's it.

Obviously, you don't want to sell contracts for more shares of Intel than you can afford to buy- 

for example, if you have a $25,000 investment account you don't want to go selling 10 contracts because those contracts would cover $35,000 worth of stock - which you might have to buy.

Avoid that uncomfortable phone call from your broker, please.

Also, keep in mind, this article is just for your education about how this idea works.  

I'm not suggesting that you should actually do this, or that you should actually execute the illustrated Put sale.  

This is just and educational exercise.  I'm not your adviser, broker, financial planner, etc.  

Do your own homework so you become comfortable with this concept.

Have a Better Day with a Morning Routine

Welcome

Want to have the best day possible?
Want to get more done?

You need to improve your morning routine.

The way you start your day can improve your entire life.

I know that sounds like a huge, crazy claim, 

but its truth has been learned over centuries.

The way you start your day takes advantage of your natural surplus of willpower in the mornings.

Every decision we make throughout the day subtracts a small amount of that precious willpower.

That's why routine matters.

We can accomplish a lot of important tasks without any decisions, 

if we make those decisions ahead of time - through the use of a routine.

Mark Zuckerberg wears the same thing every day, so did Steve Jobs. 

President Obama only wears blue or gray suits and he tries to avoid decisions about what he eats.

They are intentionally avoiding decision fatigue and keeping their precious willpower for later, more important decisions.

Here's the secret sauce: Your Evening Routine is what sets up the success of your Morning Routine.

Your Evening Routine is important.  See to it.

I have collected the items on my Morning Routine from reading books and others' blog posts about this.  I particularly like the The Mission and The Art of Manliness posts about this.  

A very highly regarded book on the topic is The Miracle Morning by Hal Elrod.

Exercise your Google-fu and your library card and find out what you might want to include in your own routine and why.  I will tell you what is a part of my routine and why.

I begin my routine as soon as I wake.

Once I wake up, I stay in my sleeping position, in bed, for a moment and try to recall my dreams. 

This helps with lucid dreaming.

Waking at the same time each day is ideal, just as it is ideal to go to bed at the same time each night.  I personally struggle with this because sometimes I like to stay up way too late watching movies or videos.

Then I sit up on the edge of the bed and reflect on gratitude and all the wonderful things that I am grateful for and then I pray.

Next, I plug in my electronics, so they can charge up while I am proceeding through the rest of my morning routine and they'll be ready to go when I am.  

I take a quick scan of my phones to see if there is anything that is both urgent and important that I must address immediately.  

The most important part of my Morning Routine comes next:

I review my To-Do List, which was completed the night before during the Evening Routine, and my Short and Long-Term Goals.
This leads right into reviewing the day's scheduled activities and the important scheduled activities for the rest of the week.
Add to your To-Do List any other items that come to mind.  If they need to be scheduled, add them to your schedule.
Try to set your schedule so that the most important things get done first.
Always schedule your workout!  If you don't, it is far less likely to happen.

With that done, I start moving.

I walk to the kitchen and drink a large glass of water.

I take a shower and, while in the shower, I do stretches and squats.

Then I shave.

The ritual of shaving with a straight razor and strop gives further time to think clearly.

Next, I dress.
I always wear the same thing to work; it is my uniform for the day.

Then, I gather my electronics, phones, books, bags, and anything else that I need to take with me that day.

Finally,  I eat my breakfast.
I always have the same thing for breakfast.  I have a large cup of Major Dickason's Blend by Peet's Coffee and Belvita Bars.

Feel free to adapt this, in any way, to your own life.

Take this concept and make it your own. 

Find a way to make it work for you.

I promise it is worth it.
I wish you a good morning and a wonderful day ahead.

Your Evening Routine Grants You a Better Night's Sleep and a Better Tomorrow

Welcome.

Want to have a better day tomorrow?  

Want a better night's sleep tonight?

You need to improve your evening routine.

For a while I found myself struggling to sleep at night.
My mind would race, endless thoughts running into one another, getting in each others way.
It was like they were all struggling to stay afloat in the turbulent sea of my mind.

Luckily, I found the solution.  A proper evening routine.
I sleep much better now, and my days are more productive when I wake the next morning.




Our brains operate, to some extent, like a computer.
They can do only do so many things at once and they can only keep so many things in memory at once.

There is a computer which I have no other option but to use everyday - it is a perfect, terrible example.
I do a lot of work on it, but I have learned that it can't do everything at once.
So, like an Apollo astronaut, I have to close one thing before I can start another, otherwise the whole system runs the risk of crashing.
If your computer is like that one, there isn't enough RAM.
RAM is the stuff that your computer uses to keep things at the ready, for instant use - the stuff it doesn't want to have to take time retrieving later.
For everything else it stores it somewhere buried in the hard drive - with a little look-up address so that it can find it later.

When your computer starts running low on available RAM, everything slows down and performance goes down the tubes.

Our brains are often the same.  We get busy, we finally remember that thing that we've been trying to remember forever.  We have to do this, that, and the other thing.  We have a list that constantly grows in our minds of all the things that we need to do and find, remember and accomplish, stories we just have to tell and pictures to share.  Associations develop that remind us of other things we have to do/tell/share.  It goes on and on.

The more of these things we add into our minds, the more cluttered and busy our minds become trying to remember and keep track of it all.  It is like we are running out of mental RAM.  Trying to go to sleep that way is hard.  Your brain is working hard to remember it all, to keep it there, ready for you to use, because it is/was important to you and you haven't completed the task for which you put that bit of information into your mind's short-term storage.
It takes energy.  It takes willpower.


The solution is simple - we have to get these things out of our minds!


I'm going to suggest later that we write everything down before we go to bed - to create a 'hard copy' that our minds know where to go to get the information when we wake up.
Suddenly, our minds are freed of the responsibility of trying to remember it all.
Ooohh Yesssss!  You can almost feel your brain sighing with joy for that release, can't you?


But just writing things down won't do it all by itself.  This is not a one shot-one kill issue.
Our minds are more complex than that.  So let's advance to greater and deal with the subtleties that will help us get more out of this practice.

First, we should strive, each evening, for the same routine leading up to our sleep.  Going through the same motions, the same activities, in the same way trains our bodies and minds for deep, restful sleep.

I begin my routine after dinner.

Dinner is at 5:30.  This is "electronics off" time.  Outside of extraordinary circumstances, I try to not use electronics after this time.

Then I play with my kids until its time to start getting them ready for bed.
Their bedtime routine begins with us all helping to pick up and put away all the toys that are out.
Next, its bath time, brushing teeth, getting them into pajamas.
Then stories read, prayers said, and off to bed.


As soon as the kids are asleep, I like to do a 5-10 minute whole-house cleanup.
It is amazing what you can accomplish in 5-10 minutes!


Then, I like to get a glass of water or (occasionally) a caffeine-free herbal tea.
Often, I will read for 15 minutes from a good book.
Not a fiction novel usually, although I enjoy those at other times of the day, I find they don't make good 'before bed' reading.  Rather, I like to read books about success, self-improvement, or biographies/autobiographies of great people.
Here is one that I re-read some little part of every. single. day.
The Twelve Universal Laws of Success by Herbert Harris.


Now comes the really good stuff --- "the secret sauce" --- are you ready?

That's my journal.  

A Moleskine in a Saddleback Leather cover.  I absolutely love and whole-heartedly recommend the Moleskine brand of journals.  The quality is excellent.  Quality and beauty are the two main points when it comes to the Saddleback Leather cover for the Moleskine.  It is beautiful and you can tell it will last as long as you live!  It could not be a nicer item.

Before I go to bed each night, I review what happened during the day.  

I do that on the left page in the journal, where the tip of the pen is pointing here:

I'll write about how I felt about the day, what I did or accomplished, a note about people I helped, etc.  It is neat to be able to read back through these at the end of the year and there are a lot of things that you'd have forgotten about had you not written them down, but when you review them, you can remember those interactions and events in detail.  It is often a source of good feelings.

Writing down how your day went also allows your brain to get it out and let it go.  

That is cathartic and helps you sleep better.

On the right page I'll start off with "To Do on (and then I write in the day and date)."

Beneath that I start a little to-do list.

Add everything that comes to mind to your to-do list.

It doesn't matter how mundane it is, how small the action-item...put it down on paper.

Get it out of your mind.

So you can end up with 'minor' things on your to-do list like:

• call Mom
• remind Flora about the hockey game tickets she mentioned
• ask cousin Tony about that strange sound my car is making

Of course, you will have all the important things on there too, like:

• Workout
• Work/Business 
• Get that Anniversary present!

Once you have your to-do list, below it you're going to want to do what I call a "Brain Dump."
A brain dump is basically getting every random thought that swims to the surface of your mind out and on paper.  Don't judge these thoughts, don't select which you write and which you don't, just get them out.  Let your mind be released of all the junk that is taking up space in its 'RAM'.

You may well end up with a stream-of-consciousness kind of mess.  You could end up with anything, really.  Don't judge yourself for any of it.  Don't judge or pre-judge your thoughts as they come up.  Just let them come out and onto the page.  

The first few times you do this, it is very likely that you will end up needing additional space - that's fine.  Use as much paper as you need, turn the page and carry on.  The tree was already cut down to make the next page, so you're not going to save a rainforest by not using the next page in your notebook.  Use it.

Some of the thoughts that come out may not be pretty.  That's fine.  We are all merely human.

You might end up with more things for your to-do list.  That's fine too.  Add them on.

You may well end up with something like:

"

I need to think of a present for my buddy's birthday.  What does he need?  He needs a girlfriend, really.  

Stacy was wearing an interesting outfit today.  

Oh, My, God, Becky

I wonder what Sir Mix A Lot is doing these days

Becky's birthday is coming up, I ought to ask her about gift ideas.

Christmas seems like its far away, but I ought to start saving up for it now.  Its always so expensive

I need more money!

Start a business?  Fight the Starbux addiction! that'll help.

"

It can go on and on sometimes.  

The point is to get it out of your mind and onto paper.  

Then, like a computer, your brain knows where to go to pick up where it left off, or to review things so it can remember to do them at another time.

All these exercises do is free your mind and prepare you for peaceful, restful sleep.  Your brain will finally have the peace it needs to completely let go and not have to worry about remembering to remember something.


Then, I lie down in bed, say a silent prayer, and meditate until I fall asleep.

Keep your journal/to-do list next to your bed.  If you find yourself thinking of something when you should be sleeping, write it down.

Feel free to adapt this, in any way, to your own life.  

Take this concept and make it your own.  

Find a way to make it work for you.

I promise it is worth it.  

I wish you a very good night's sleep.

Advanced Investing - Options - Part 1 - Selling Covered Calls

Welcome.

Here's where investing starts to become a lot more fun.

This is where you start to pad your account with 'extra' money.

When you own 100 shares of a stock, it is called a "round lot."  200 shares would be two round lots.  300 shares, three round lots.

Round lots are really the only amount that professional investors will take a position with.

There's a reason why that is.  

Options.

Options are contracts that trade in the stock market just like regular stocks do.  In fact, if you look at a share price on Google Finance or Yahoo Finance, you'll likely see a little note about the options.

Each option contract controls 100 shares of stock.  

Well, here's a cool thing you can do.

You can apply for permission with your broker to trade options.  This usually entails filling out a questionnaire and reading and understanding some risk disclosure notices.  It's not a big deal.

If you've never traded an option contract before - that's fine.  They'll generally start you out with the level of permission that we're covering right here - Selling Covered Calls.

They'll do that because it is the safest of all the option strategies.

Here's why they'll let a complete novice do this: with a Covered Call, it is hard to lose money.  

Now you're in on the secret.  This is a great tool!

Selling a Covered Call can be thought of like this:

If we own 100 shares of Intel, we can sell a Call against them that will give someone the option to buy them from us at a set price at some point in the future.  We can choose what price we'd be willing to sell them for!  We can choose what date we'd like that contract to expire on!

So, if we bought them at the current price of $29.90, just as you see in the picture above, we can agree to sell them at a set price (I suggest a higher price than what you bought them for) and with that option expiring on a certain date in the future.

So, if, based on the picture above, you spent $2,990 today (May 5, 2016) and bought 100 shares of Intel you could then sell one July $33 Call for about $0.21 per share!  

Since, as we said early on, each contract covers 100 shares, that one contract sold would bring $21 into your investment account, immediately.  You get to keep that $21 no matter what.

Now, up at the top of the table you see "View options by expiration" and then July 15, 2016 is selected in the drop-down box.  

Each option contract expires on a certain date.  Most of the time, those are at the end of the day on the third Friday of the month.  In July 2016, that's the 15th.  Sometimes there are contracts that expire on other Fridays, though, so pay attention to which you select.

The expiration date of the contract determines what will happen to the shares after the market closes on that date.  Here's how it's figured out:

If, on July 15, 2016 Intel closes at $32.99, then nothing happens.  You keep your shares and you, of course, keep the $21 you took in when you sold the contract.  Basically nothing changes.  On the next trading day you're free to sell another Call against those shares and bring in even more money.

If, on July 15, 2016 Intel closes at $33.00 or higher, then your shares get bought by someone else for $33 per share (this is referred to as having shares "called away").  $3,300 will show up in your account and the shares will disappear.

Since you paid $29.90 for them, then got $0.21 per share for selling the Call, your actual price for the shares would be $29.69.  

If your shares were called away at $33 each, you made 11.14% for the two and a half months you owned those shares!  Not bad at all!  Many people would be happy to earn that kind of return in a whole year.

That's it, those are the only two outcomes.  

Either you keep your shares and you're free to sell more Calls against them, bringing in more income upfront, or

your shares get called away and you sell them for a profit.

Easy-Peasy.

Now, of course you can't trade stocks through Google Finance or Yahoo Finance - you have to use your own broker.

Each broker has its own way of doing things, but in my experience, its pretty darned easy to do this.  If you need help your first time, there are usually very helpful people at your broker's support center that you can reach out to for help.  Once you do it a time or two, its easy.

I'll show you how it looks in Interactive Brokers.  Other brokers will be similar.

You just select the Option tab - between Stock and Futures.

Select Sell from the drop-down box

Input the desired number of contracts to trade (remember one contract covers 100 shares!)

Input the ticker symbol (in this case its INTC for Intel).

Select which expiration date.

Select which price.

Select Call, since you're selling a Call.

Input your price - I suggest putting in about what the market is trading them for (within a penny or so) 

Make sure the order type is a "Limit Order" - on Interactive Brokers that is "LMT".

Then you click the Preview Order button

Look everything over carefully to make sure its right...

then click Submit Order.

Done.

Relax.

Pension Planning Problems

Welcome.

*First things first - eliminate the word "problem" from your vocabulary.
(Just typing that word into the headline above nearly caused me to break out in hives.)
Small thinkers use the "p" word.  Those of us who want to advance to greater in all areas of our lives will learn to eliminate that word from our lexicon.  

I prefer to use the word "challenge."  It almost always works as a direct replacement for the "p" word.  Using the word 'challenge' connotes that the issue is resolvable, that it is overcome-able.

The other word does not carry that built-in solve-ability connotation.  

As we advance to greater we learn to focus on controlling what goes into our brains and what comes out of our mouths.

So - how to plan your retirement if you have a pension?

I have a pension.  It makes planning for retirement both easier and harder.  

If you do too, you know what I mean.

Here's how to incorporate a pension into your retirement planning.

First, you have to gauge, guess, estimate, and investigate how likely you think it is that your pension will still exist throughout your lifetime and be able to fulfill its promises to you. 

If you work for a private company in a terribly-inefficient industry, like airlines, you could reasonably guess that your pension is not something you can count on.

If you have a pension from a government, your pension is likely more reliable - after all, the government gets its money no matter what.  They skim taxes right off the top of the economy.
Further, if money gets tight, they can cut programs, raise taxes, or both, to help fund themselves.

Even governments, though, can and will cut pension promises if necessary.  And governments often do a worse job of stewarding the money that they are responsible for than private companies.  

All that boils down to say that you need to assess the probability that you believe that your pension will be able to fulfill its promise to you when it is time for you to collect.

Next, you need to decide, based on your assumptions above, if you need to discount your pension in your retirement calculations.

After all, if you plan your retirement perfectly but then your pension cannot pay you what you had planned on receiving from them - you may have to delay retirement, cut your retirement lifestyle, or go back to work.  None of those are what you planned for.

If, as in the example above, you have a pension from an airline - you might choose to discount it by 70% - and plan on receiving only 30% of what you were promised.

If you have a very safe and secure pension, you have determined that it is well managed, well funded, and secure in every way, then you might not discount it at all.  You could say that you expect to receive 100% of what they promise you.

Finally, it is time to do the minor math to assimilate your pension into your retirement planning.

Each year while you are still working, you should receive from your pension a Statement of Estimated Benefits, or something like that.  On it, you should see an estimation of your monthly payment from the pension based on your eligible retirement date(s).

If you need to discount your pension's ability to deliver on its promises to you, multiply the estimated benefit amount from the statement by the appropriate percentage.  If you said you thought you'd only get 30% of it, multiply it by .3 to see what you are expecting to get from the pension.  If you estimate 50%, multiply by .5.

If the amount you expect to receive from your pension covers your expected expenses in retirement, then you are done.  Your pension should be enough!  Now you just have to wait to collect it.  Avoid getting fired - and make sure it is being properly stewarded for you.

If the amount is below your expected expenses in retirement, then you need to determine what the shortfall amount is.

Let's use an example to illustrate this:

Let's say you expect to spend $2,500 per month in retirement. (That's normal plus a little bit of cushion)

That means your yearly expenses will be about $30,000.

Using the normal rule of thumb for retirement planning of 25 times your expenses, you'd want to have $750,000 in your retirement account.  (That amount allows you to take advantage of the 4% Safe Withdrawal Rate rule of thumb.)

Since you have a pension, though, that needs to be accounted for.  

If, using the illustration from above, you have a pension which you believe you might only receive 30% of what you are promised then you take the estimated benefit from that Statement of Estimated Benefits - say $4,000 per month, and multiply it by .3.

That gives you $1,200 per month that you are willing to count on from your pension, anything above that will be a welcome benefit.  

That means that you are willing to count on $14,400 per year from your pension.

Multiplied by 25, that gives the pension a value of $360,000.

If your needs are $2,500 per month, then we need to save enough on our own, outside of the pension plan, to make up the difference.  $750,000 minus $360,000 = $390,000 that is the shortfall you expect.

Let's use the same numbers from the Bitchin' Budgets post that I did recently - assuming you earn $48,000 a year.  Using the guidelines I established there for the DISCs, you would be putting $9,600 per year into your investment accounts.  That's $369.23 per paycheck (assuming you get paid every two weeks).

If you put that into your investment account for 22 years and only earn an average of 5% per year on it, you have your pension's shortfall covered.

If you earn 7.5 percent, it only takes 18 and a half years to make up for the shortfall.

At a 10% return, it is just 16 and a half years.

That gives you power and control!

Start saving and investing now!




**As a further aside, I believe that it is incredibly valuable to see to it that any money that is stewarded on your behalf in a pension, or a company-controlled retirement plan is being properly managed.  There is likely a committee of employees which are elected by their colleagues to sit on a Board of Trustees to oversee that the management is done well and properly.
Attend those meetings.  Ask questions.  If anything is going on which you do not understand, ask more questions and consider running for election to that Board at the next election cycle!
What you will learn as a Trustee is incredible and it certainly will help you Advance to Greater.

Bitchin' Budgets

Welcome.

We have talked quite a bit already about the overall plan for your money, as well as how to get out of debt, and of course, how to invest.  

Now it is time to talk about how to run your money in your own home.

It seems like every subject matter expert out there in the field of personal finance recommends that everyone creates, follows, and constantly updates their budget.

Budgets are great, yes, but
most people either won't create one,
or they won't stick to following it once it is created.

As a result, continuing to recommend budgets isn't too helpful for most people.
  

In my opinion, it borders on annoying or even alienating people from taking control of their finances!

Personally, I think we can advance to greater!  

Budgets are going to become a thing of the past once the word gets out about my 

Spillover Spending Plans.

Here's how it works:

We prioritize our spending.

First, in my book, is God.

  

So I am committed to tithing.  I give 10% of my gross income to my church.  I think tithing based on your gross income is more faithful and proper.

I have witnessed incredible good fortune come into my life and into the lives of others when I and they started tithing.

• If you are not a religious person - that's absolutely fine!  However, I believe that giving is important and it will help you.  Give to a charity that you believe in.

Second, is me and my family.

This means we pay ourselves next.  No one else is going to do this for us - so we must remain committed to doing this.

We pay ourselves into our investment accounts and our savings accounts (more on this later).

Third, we set aside money for deferred expenses like large, irregularly occurring bills, such as Real Estate taxes, Christmas gift spending, the yearly Insurance premium, and a pool membership.  That way, when the bill comes in, we have a pile of money already saved up to cover it - we don't have to figure out how we're going to make it work using the money from the current month's income.  Every so often we realize that we have too much extra money sitting here (in my personal experience) so we sweep the excess to a more-productive account (usually an investment account).

I like to remember these top-tier spending considerations using the mnemonic DISCs.

DISCs are:

• Deferred Expenses
• Investments
• Savings
• Charitable Giving

Once your DISCs are fully-funded, the money that is left over is for your other, day-to-day or month-to-month living expenses.

I like visuals, so here is how this looks for me:

First, you dump 10% of your gross income into your tithing/charity cup.

Then, you add to your Emergency Fund until it is full (minimum of 3 months of expenses).  If this takes all of the rest of your income - then that's as far down the Spending Spillover Plan as you go.  

Now, I understand that you have to pay for rent, food, and utilities - I don't want you to starve or be evicted, but I also don't want you to think that you can spend willy-nilly.  

Until you have a fully funded emergency fund, you must be dedicated to filling it up fast.

Savings into this account and your Targeted Savings accounts should be 10% of your gross income, minimum, forever.  

If you manage to fill your Emergency Fund and all of your Targeted Savings accounts are all fully-funded for their purposes - then you set this forever-incoming 10% aside into another general savings account or investment account that you can draw from if needed.

Then you fund your investment accounts.  Tax-advantaged accounts get filled up first.  I recommend investing 20% of your gross (that's pre-tax, remember) income.

Next, you set aside money each month for your deferred expenses like Real Estate Taxes, yearly Insurance premiums, or even quarterly bills like Water/Sewer.  This will probably come to a bit less than 10% of your gross income, but I like that round number, 10%, so its what I use and recommend.

After that, I like to fund various savings and/or investment accounts which I think of as "Targeted Savings Accounts."  These are where I do, and you should too, save for foreseeable expenses like your next car, the vacation you want to take, building a deck, replacing your home's windows, the next house, etc.

No one else will do this saving for you.  And if you don't have your savings built up, you might sign up for debt to pay for the next thing - which puts you back to square one and starts you back on the path of working to give your money to someone else.  Don't sign up for debt!

Think of it this way, if you get paid every two weeks and you set aside $100 out of each paycheck into your "Next Car fund," in 5 years you will have $13,000 sitting there to help replace a car.  I use an investment account for this to generate higher returns over this medium-term saving period.

You may have noticed that your DISCs take up 50% of your money, 

based on your pre-tax, gross income. 

• 10% Charitable Giving
• 20% Investing
• 10% Saving
• 10% Deferred Expenses

After your money trickles all the way down and into your spending cup - that is where you get to buy things like a place to live, food and entertainment, meals out, dates, household supplies, and cool gadgets.

This is actually less than 50% of your income because your DISCs were all paid out using your gross income number - the money coming in the door is less than that, for most people, because of the taxes taken out before they ever get to see their money.

This Spillover Spending Plan makes things challenging, but it enforces a kind of spending discipline on you without you having to create, and stick to, a budget.

Obviously, as your income increases, the extra spendable money is noticeable and welcome.
You can set this on auto-pilot with most banks and investment brokers where, as soon as you get paid, they automatically transfer the correct amount to your other accounts.
That makes your spending discipline even easier!

Here's an example:

If your employer pays you the national average $48,000 yearly income, here's how this might look for you:

Based on living in Virginia, which is a moderate tax state, your take home pay would be around $36,975.  That's about $1,422 that shows up in your bank account every two weeks.  You can do a rough numbers check for your state here.

• $4,800 goes to your religious organization or a charity that you want to support.  Leaving you with $32,175.

• $9,600 goes to your retirement account(s), leaving you with $22,575.

• You save another $4,800 for the financial challenges you want to avoid and the things you want to have in the future.  That leaves you with  $17,775.

• You set aside $4,800 for your large or irregular deferred expenses too, leaving you with $12,975.

If you get paid every two weeks, like many people do, this level of income and this Spillover Spending Plan gives you $499 left over to spend each two weeks!  That's money for a good place to live, food, and whatever else you want.  And it all comes with the security of knowing that you are saving and investing at the right rates to set yourself up forever!  

You can move forward into living your life from this point, knowing that if you have the money for something, you affirmatively CAN afford it.  It takes away the stress, the anxiety, and indecision.

A well-crafted Spillover Spending Plan can make your financial life so much simpler - and best of all... NO BUDGET!

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If you like this idea, you can use the following to craft a version of this that is best for your particular circumstances:

Even a simple editing program like MSPaint is helpful.

Below, I have included one with Mortgage/Rent as a cup - since a lot of people like to think of it this way - feel free to adjust these to your needs.

Then you can print this out and start penciling in numbers until you figure out what works for you!

The thing is, though, that the above illustration, while useful to many because it is how they think of things, is flawed.  

Your rent or mortgage payment should not be that high up in the spillover spending plan.  

It should come right after/below your targeted savings accounts.

It is only once you have paid yourself, fully, that you can start using the leftovers to live on.

Those earlier/higher payments to yourself (and your Tithe) are what set your life up for perpetual success.  It is what sets your investment accounts up to be fully funded when you need them.  It is what sets up your life to be free from stress and want later in your life.

It is worth it to win with money.  You don't want to have too much financial pressure on you when you're older and you're less-able to convert your ability to work into financial capital.

If you find that the Spillover Spending Plan doesn't leave you with enough money to afford food, shelter, and utilities it is important to consider:

• Are you living in a place that is too expensive?
  Downsize your shelter expenses.
  Move to a less expensive place, try for a place close to your work.
  Your choice of shelter is the single largest determinant of the rest of your level of spending.  Big houses cost a lot to insure, heat, cool, maintain, landscape, and use a lot more electricity.
  There is also psychological pressure to 'keep up with the Jonses' and have nice cars in the driveway of a nice house.  Those cars are expensive.

• Are you making poor food choices?  Eating out is expensive!  

• Are you making poor transportation choices?  Is your mode of transportation too expensive to own, maintain, and run for your current level of income?  Are you commuting too far?
  Get a bike!

• Is it time for a roommate?

• Do you need to upgrade your education, skills, or work ethic to make yourself a more valuable and - eventually - a much better-paid employee?

• Is it time to start your own side business?

• Do you need to take a second job temporarily?

Intermediate Investing

Welcome.

So, since you still want to beat the market over the long term and you want to have even lower costs, you'll need to get just a little bit more advanced.
Strangely, this is easier than you think - you probably already know what to invest in.
I'll just show you how.

First, to make this easiest, you'll need an online discount broker like the following:

That's not an all-inclusive list but it gives you an idea of the kinds of online, discount brokers that I am referring to.

Just check them all out and pick one that you like based on your wants and needs.  Then, sign up for an account with them, they'll help you to make it easy for you - they want your money - so they are happy to work hard to make it easy for you to give it to them.

Next comes the fun part, figuring out which companies' stock to buy.

Imagine that you had just been given a vast pile of cash to invest...enough that you could buy whole businesses, instead of a few shares of stock.  Which companies would you buy?

Or thinking of it another way, which companies do you know, right now, as a layperson, are awesome businesses that make money all the time?  It's probably a quick list of the biggest, best businesses in the world.

My favorite way to think of it though, is whose products do you use day after day, without even thinking about it?  This works especially well if you think of yourself as an average person and leave out your own personal tastes and preferences.  What's common.  What do people use without thinking?

Start in the morning - you wake up and go the bathroom - whose products do you use?

Easy, you probably touch a half dozen products made by Proctor and Gamble (PG) and Johnson and Johnson (JNJ).

Then, you leave the bathroom and fix breakfast for the family.  Whose products have you bought to satisfy that need?
Probably Kellogs (K) and General Mills (GIS).

As you are getting dressed, whose products are you touching and making sure you take with you?
Got an iPhone? (AAPL)
Or maybe yours is an Android (GOOGL)?
Perhaps, in a spendy past life you bought a Coach (COH) purse or wallet or case to carry your things?

Now, you have to get to work - its most likely that your transportation uses some sort of fossil fuel.  Which are the biggest best companies in the oil and gasoline business?  Exxon Mobil (XOM) and Chevron (CVX), of course.

Now, you get to work.
You sit down at your desk and login to your computer running whose software?
Microsoft's (MSFT)
It's built using whose chips inside?  Intel (INTC) is inside, of course.
Look up at the wall, or ask your IT guy - whose products form the backbone of the intranet and internet that your computer is going to connect to?  There's only one answer.  Cisco (CSCO)
Who carries that information that you are using on their lines?  AT&T (T) or Verizon (VZ).

Does your company use any cloud computing?  Or any massive servers?  Big Data?  Who does those?  Microsoft again, IBM (IBM), and Amazon (AMZN)

Ahh, time for lunch.

You head out to grab a quick bite to eat.
Which is the biggest, richest fast food place in the world?
McDonald's (MCD) and while you are inside whose cold drink goes best with your fries?
Coca-Cola (KO).
Oops, you spilled something on your shirt - gonna have to bleach that...
You're thinking Clorox (CLX) aren't you?  :)

You decide that since you've been bad for lunch, your going to eat healthy tonight at dinner so you plan to stop by the organic grocer to pick up stuff for dinner on your way home.  Whose the best in that arena?  Wegmans (a private company - we can't buy their stock) and Whole Foods Market (WFM).

Back at work you grab a chocolate bar, probably made by Hershey (HSY) while your friend goes outside for their smoke break.  Whose cigarettes are they smoking?  Probably something from one of these Philip Morris (PM), Altria (MO) or Reynolds (RAI).

You get home from a long, hard day at work.  What's the number one frosty, cold adult beverage for most people?  Yep, they crack open a Budweiser (BUD).  More a liquor person?  You probably have bottles of the stuff made by companies owned by Diageo (DEO) - did you know that?

Thinking of buying some stuff?  Where would you go to buy it?  Wal-Mart (WMT) or Target (TGT), if you're like most people.

Thinking of going out to dinner?  Which company delivered the food to that restaurant?  Almost certainly it was Sysco (SYY).

What if you have a medical challenge - as so many people do?  You'd probably be accustomed to using products, even if you didn't know who made them, from Medtronic (MDT), Beckton Dickinson (BDX), and the medicine you need probably was delivered by Amerisource Bergen (ABC) or McKesson (MCK) to Walgreens (WBA) or Rite-Aid (RAD).

Start thinking for yourself now - who is the biggest bank or two?
Who are the strongest insurance companies?  Who do you use?!

Thinking about it this way, you'll come up with quite a list.
Just the ones that I put in bold are 35 different top companies.  That's a lot of diversification!  Diversification helps protect us from what we don't know, don't expect or foresee, and which we can't control.  At this intermediate level of investing - embrace the philosophy of diversification!



Now, just put an equal amount of your money into each stock.  Easy peasy.



I do have one caution here - if you are just starting out - or if your investment account balance is a little low - invest in chunks of at least $500 at a time.

That way you keep your commission fees down under 2% of your purchase price.  If you're starting out this way, each time you get $500 - buy another $500 chunk of shares in one of these companies.  Keep doing it until you fill out your list of companies.



Want to take this strategy even further?  Of course you do!  This is Advancing to Greater!  We want to do things in a great way!

Simple - and free - Enroll your shares in your broker's Dividend Re-Investment Plan.
These are often referred to as DRIPs.
This way, when your shares pay out a dividend, your broker will automatically convert that cash into more shares - even partial shares - of the company for you.  And it is FREE!
DRIPs are a free way to see the power of compounding work perfectly and automatically on your behalf.


Here's the hard part - especially for the intermediate investor - do nothing.
Never sell.
No matter how bad the market looks.  Ignore the news.  Watch a movie instead. The world has a way of keeping on keeping on, no matter how bad things look.

Want to make this easy on yourself?  Set up your broker to automatically pull money from your bank account to fund your investments.


NEVER SELL.  Let your DRIPs work for you over time.

Congratulations, you're now quite a good investor.

Getting Rich is Boring!!!

Welcome

Getting control of your finances is fun.

Figuring out how to develop a Spending Plan that will allow you to hit your goals is empowering.

Paying off each successive debt is gratifying and the sense of real progress is palpable.

Its exciting, you're making changes.  You're making decisions.  You're Adding Assets and Limiting Liabilities.  You're making worthwhile sacrifices.

And then, one day, you become debt free!  

You go out to a nice dinner as a reward.  

You feel the blades of grass between your toes for what seems to be the first time ever.  Your elation is causing you to break out in little happy dances at random times.  The sky is so beautiful, you feel the air in your lungs and the warm sun on your face.  You're happy.  You're smiling.

Then, after a couple of days, you are in bed trying to go to sleep when you realize that you just made it to zero.  You got out of the hole that you were in.  The perpetual smile starts to slip.

And while getting from a negative net worth to a positive one is awesome and it was totally worth it, all of a sudden you realize that it doesn't mean that you've made it.  You're not wealthy yet.  You're not financially independent yet.

Now you're on the path to becoming wealthy.

It is boring.  You keep doing what you had been doing.  Except now its automatic.  You've developed the habits.  You've setup automatic transfers so that some of your money goes automatically into your savings and investment accounts.  You don't have to make cliffhanger-dangerous financial decisions because you are not a slave anymore - you don't owe.  

Its kinda dull.  

That is exactly what the process of becoming rich feels like.

It is slow.

It is not dramatic and fast-paced and it is certainly not a wild ride.

Becoming rich is a process that takes time.  

Even if you invest 70% of your take-home pay (easier for higher-earners, for sure) - saving up enough to have your Freedom Figure is still going to take you 8.8 years.  That can feel like a drag.

That is the feeling of becoming wealthy.

When I counsel people on their finances and they get out of debt - sometimes even before they get all the way out of debt - they will invariably tell me that the 'fun' went away.  They're right.  It did. 

Becoming wealthy is more fun the further you get into it, but it is a process, and it always starts slow.

It takes time.  

It takes persistence.  

It takes consistency.  

It demands your resolve and discipline.

Having your Freedom Figure in your investment account is worth it.  I promise you, it is worth it.

Pursue your goals for your reasons, but earn your freedom.  

Push through the boredom of becoming free.