Category: Goals

Our Shocking Investment Strategy… Individual Stocks

This is the second in a series about how we do things differently.  Check out the companion post, Four Personal Finance Rules We Ignored (And Maybe You Should Too) for more about how we disregarded the advice of a popular mainstream personal finance personality to forge our own path to debt freedom and financial independence.  

I got interested in the stock market at an early age.  Around fifth grade, my parents helped me cash in years of birthday money to buy shares of Merck, Disney and TWA.  Merck was a broker’s suggestion, but the two other purchases were based on my own likes as a young consumer (including a love of travel that continues today!)

When I sold those shares of Merck and Disney shortly before college graduation, thanks to years of market growth and reinvested dividends, I had more than doubled my money.  And while TWA filed for bankruptcy just a few months after I bought the stock, it taught me a valuable lesson about risk:  No company, regardless of its size, reputation, or history, is infallible.  When it comes to investing in individual stocks, while you can make big gains, you also have to be prepared to lose it all.

Like many of my personal finance friends and idols (including Mama Fish Saves, Our Financial Path., Budgets are $exy, and of course, Jack Bogle and his devotees) our holdings include a variety of low-cost index funds.  Index funds replicate a market or segment of the market, such as the S&P 500, Dow Jones Industrial Average, FTSE 100, Nikkei 225, or the MSCI EAFE.  They are passively managed, and because of minimal buying and selling, fees are low, making them a popular investment vehicle.

Where our philosophies start to differ is when it comes to individual stocks, which are also a key part of our portfolio.  Our strategy is simple:  We regularly take $1,000 and buy shares totaling that amount in companies whose goods, services or commodities we see used in our daily lives and we believe will experience continued success.

Ideally, we prefer to buy  income stocks, or stocks that generate dividend payments, which we reinvest into more shares of that stock.  But you’ll see in the interactive visualization created by my smarter half, Ryan Sleeper, we also have a few growth stocks, which represent growing companies that reinvest their earnings back into the company instead of paying shareholder dividends.  The cost we incur is a one-time $7 per trade, and we buy and hold, so fees are still comparatively low.

Here’s how we’ve done since starting this strategy in 2013:

(Clicking on the image will take you to an interactive version of the visualization)

     

A few standouts include:

Transocean, Ltd (RIG) – One of our first stock buys, this was a broker pick.  While luckily it didn’t turn us off of individual stocks completely, it did teach us to go with our gut and buy what we know, and not what an adviser recommends.

3M, Johnson & Johnson, Microsoft, and Disney – These are all brands that every American has and uses on a daily basis.  Think you’re a uber-cool SINK or DINK and Disney isn’t reflective of you?  Think again.  Disney owns Marvel, The History Channel, Lifetime, A&E, ESPN and the American Broadcasting Company, better known as ABC.

Ulta and Amazon – We bought Amazon around the time they released Fire TV, knowing that an increasing number of Americans are cutting the cord and choosing streaming television and movies, as well as foregoing the traditional bricks and mortar shopping experience for one involving Prime (and for me, a glass of pinot).  I’ve also been a fan of Ulta for a few years.  I appreciate that they cater to a range of demographics by carrying drug-store brand beauty products as well as luxury labels.  I saw their growing presence in our city as a sign that others must like them too!

Tableau – My husband makes his living using this software to interpret data for corporate and non-profit clients, teaching others how to use it, and evangelizing its functionalities.  It took some convincing, but my husband believes so strongly in this product, that I relented.  And so far, he’s been right.

For us, including individual stocks as a part of our larger portfolio keeps us thinking, learning and engaged in our investments.   And it’s another way we keep personal finance, personal.

The author of this post is not an expert on buying and selling stocks or any other investment vehicle.  These and all investments come with a level of financial risk, which are the sole responsibility of the investor.  This post and commentary contained within is not professional advice or an endorsement or recommendation of any individual stock, company,  investment or strategy.

Four Personal Finance Rules We Ignored (And Maybe You Should Too)

This is the first in a series about how we’ve disregarded the advice of popular personal finance personalities to forge our own path to debt freedom and financial independence. 

Personal finance is just that:  Personal.  Your interests, values and dreams may be different than mine, and that’s how it should be.  In How Our Home Is Helping Us Achieve Financial Success, I talk about how we’ve chosen to “live little” in order to prioritize spending on things more important to us, like travel and sampling every bottomless Bloody Mary brunch in the greater metropolitan area.  But if you prefer mimosas at home in your McMansion, there is nothing wrong with that!  So when it comes to charting your course for financial success, it’s important you customize a plan that aligns with your individual goals and timelines, as well as how you personally manage money.

Here are just a few ways we tailored (or ignored completely!) the advice administered by today’s most well known personal finance experts, and took a road less traveled:

1.  Plastic is fantastic

There are popular personal finance personalities who will tell you to cancel your credit cards and only carry cash.  This is fabulous advice if you struggle with charging things you can’t afford.  But, that’s. not. everyone.  Since our written budget is what holds us accountable, we use credit cards as a tool, utilizing the consumer protection that comes with using plastic and leveraging them for free travel (right now we’re working toward the coveted Companion Pass thanks to our Southwest-branded Chase card).  We pay off any balance weekly to hold ourselves accountable and avoid paying interest.

2.  We’re all special snowflakes

The most popular strategy for paying off debt is the snowball method.  This philosophy recommends you pay off your debts in the order of the amount owed.  Continue to make the minimum payments, except on the debt with the lowest balance.  Once you’ve paid off that first debt, you move to the next debt with the lowest balance.  This method assumes you’ll find it easier to stay motivated when you’re rewarded more quickly with the elimination of individual debts.

In lieu of snowballing our debts, we choose the avalanche method, saving us time and money.  Instead of listing debts by amount owed, this philosophy had us prioritizing debts by interest rate, starting from highest to lowest.  You will end up paying less interest and eliminating your debt-load more quickly by tackling your debts by interest rate, so long as you can remain committed without the psychological boost the snowball method offers.

3.  Not all debt is equal

The same personal finance gurus often recommend stopping any retirement savings while you’re getting out of debt.  Sure, if you’re buried in high-interest credit card debt, stopping your contributions may be a smart idea.  But, if you receive a tax benefit from your interest payments (including interest paid on a qualifying student loan or mortgage), or your debts are no-interest or low-interest (like your Prius payment or the mid-century modern living room set you just bought on a store charge card), you may come out ahead in the long run to keep contributing while still paying off debt.

4.  Capitalize on compound interest

Compound interest is when an original deposit or investment earns interest which is then added to the principal amount and reinvested, earning more and more each period as the account balance grows larger from interest earned.  Compound interest means the balance of an account will continue to grow because of interest earned, even if the account owner doesn’t make another deposit.

Even though we were committed to becoming debt free, instead of stopping our retirement contributions while aggressively paying off our $85,000 in student loans, we kept saving.  We understood that the greatest financial advantage we have at this point in our lives is time.  Traditional retirement age is more than thirty years away, meaning anything we contribute now has decades to double.  We also knew most accounts have a minimum annual contribution limit, so in the future we wouldn’t be able to contribute more than the max to make-up for lost years.

Before we dedicated every spare dime in our budget to settle-up with Sallie Mae, we contributed the minimum to get the match in our respective employer-sponsored retirement accounts.  In addition to taking advantage of free money from our employers, we also made sure to fully fund our individual ROTH IRAs.  The distinction of a ROTH is that it maximizes the principle of compound interest by offering tax free growth, meaning that since income tax has already been paid on those dollars before they’re deposited, at the time of withdrawal, those monies will be tax free.

There are hundreds of television and radio shows, books and blogs that dictate a detailed plan for getting out of debt.  It’s great to learn from a variety of sources and smart perspectives, but it’s important for you to discern which parts and pieces will help you achieve YOUR definition of financial success.

Next in the Series:  Our Shocking (Yet Successful) Investment Strategy… Individual Stocks!

How Our Home Is Helping Us Achieve Financial Success

One of the biggest factors in our ability to live below our means is the choices we’ve made when it comes to housing.  Here’s how living little has helped us pay off our student loans and other debt, save for retirement, build an emergency fund, and become self-employed, plus ways you can transform your home from a money pit into a financial asset.

When Ryan and I first met, he had just moved back to Kansas City from San Francisco.  Instead of renting an apartment in one of the new luxury complexes that scatter the suburbs, he leased a one-bedroom unit a mile from his work, built circa 1970.  While it might not have looked like much from the outside, this place was plush.  For a fraction of the price our trendy peers were paying, his apartment was outfitted with all of the appliances and fixtures you would need, plus it had a working fireplace.  We still talk about how much we miss that fireplace!  Saving big bucks on his rent meant that he could buy me this, without going into debt:

Once his lease ended, Ryan moved into the house I bought before we met.  After the stock market crashed in 2008 and the housing bubble burst in many parts of the U.S., the government offered significant credits for first time home-buyers.  I took advantage of the 2009 legislation that entitled new buyers a tax credit totaling 10% of the purchase price of the home or a maximum credit of $8,000.

I’d only been out of school and at my job for two years at that point, and while it was a stretch, I saw opportunity.  I was approved for a staggering $225,000 at 5.25% on a 30-year loan, which I remember people at the time telling me that rate was a steal!  After setting my spending cap well below the amount Wells Fargo told me I could afford, I started house-hunting, targeting a popular suburb in an excellent school district that had charm, character, and most importantly, great resale value.

At a little over 900 square feet of living space, my 1.5 story Cape Cod with three bedrooms and one bath, an unfinished basement and a single-car garage was more than enough space for just me.  In fact, before Ryan moved in, the upstairs bedroom was completely empty.  Even though he left his old futon and hand-me-down mattress in the dumpster at his old apartment complex, we were still a little apprehensive about merging our stuff and the prospect of sharing a single, tiny bathroom.

Turns out, sharing a bathroom was no. big. deal.  In reality, some of our best conversations happen in the morning, while one of us is in the shower and the other one at the vanity.  And while it may be small by today’s standards, when it was new, our post-war tract house built in 1951 likely housed a growing family with children, all of whom shared that single bathroom.

Going from paying for two homes to one, helped us free up money in our budget for other goals.  Since moving in together, we’ve had raises and job changes, refinanced into a 15 year mortgage at a much lower rate, rid ourselves of private mortgage insurance (PMI) and, after paying off our student loans in 2016, are now sending extra money to principal every month.

Living little also means lower utilities.  Even in an area where the climate has us constantly running either the furnace or central air, we pay less than $100 a month for natural gas and electricity, combined.  When you add up our utilities, insurance, mortgage and taxes, we’re spending about 15% of our take home pay on housing expenses.

Here are ways you can cut costs and save money on living expenses:

  • Don’t rent or buy more than you can afford. There’s nothing wrong with a big, stately new home or a loft with urban charm, if that’s your financial priority.  But you can’t have it all.  Build your budget around what matters most to you.  If that’s your home, you’ll need to find cuts in other areas to keep your budget balanced and healthy.
  • Find a roommate. Move back in with mom and dad.  Rent a room, either on Airbnb or by connecting with your local college or medical school to see if they have students in need of short term housing during their practicums, rotations or summer semesters.
  • Regularly look for ways to pay less. Compare renter’s or homeowner’s insurance rates regularly.  We switched and saved an extra $500 by changing companies and paying in full for the year.  If you have the Internet or cable, do the same thing.  Call and see if they’d be willing to lower your cost to keep you as a customer.  Trim your utility costs with a programmable thermostat, by dressing for the season instead of running the furnace or AC, insulating windows, outlets and attics, and by unplugging electronics while not in use.
  • Watch for hidden costs. Our homeowner’s association fees are a whopping $15 a year.  Sure, a community pool, fully-equipped gym, lawn and landscaping services, and other amenities may seem attractive, but you’re paying an inflated price for them.  Consider an apartment complex or a neighborhood without these up-charges.
  • Check on interest rates. Refinancing comes at a cost, both monetary and time, but it could be worth it.  When we refinanced, it not only lowered our interest rate, but the updated appraisal showed that the home had increased in value by nearly 15% in five years.  This increased value meant we were that much closer to having paid down the 20% required to get rid of PMI.
  • Consider location. While we live in a relatively low cost of living city, housing costs decrease the further you live from a major metropolitan area.  While I’m geographically tied to my job, I often think about the benefits of moving back to my hometown, where you can buy a house the same price as a new SUV.  With the rise of telecommuting, if you can find a job that pays big city wages, small town living can offer a financial edge over your downtown-dwelling or suburban HOA paying peers.

While timing has helped us, we’ve also been strategic in the choices we’ve made to rent, buy and now, stay in our current home.  Where you live is one of the biggest financial commitments you will make.  Avoid becoming house-rich and cash-poor by making smart moves.  Literally.

Five Financial Resolutions for the New Year

New Years is my favorite (because, champagne).  But really, I love cleaning out the clutter in my closets and my inbox, and contemplating how I can be and do better in the coming year.  This January, along with renewing your gym membership, join me in becoming more financially fit.

1. Create and follow a budget

Having a budget is foundational to financial success.  It’s important to know how much you spend and on what, balanced against what you earn, in an average month.  By knowing where you’re overspending you can begin to reallocate and regain control of your money, instead of letting it control you.

If you’re new to budgeting, aim for the 50/30/20 rule.  This means spending 50 percent of your income on needs (housing, utilities, groceries and insurance) 30 percent on your wants (eating out, shopping, travel and entertainment), and saving 20 percent.  If you have credit card or other consumer debt, flip-flop the numbers to put 30 percent of your income towards debt and spend only 20 percent on wants.

For more on how to build a budget, check out my Budget Basics series.

2. Pay-off debt

First, get caught-up on any past-due bills.  Harassing calls from creditors and a ding on your credit score that will follow you for seven years, are just some of the consequences of being late on payments.  If you need help getting your bills current, start a side hustle to earn extra cash.

Once you’re making the minimum monthly payments on all your bills, there are a few options for tackling your debt:

Snowball method – This philosophy recommends you list your debts in the order of the amount owed.  Continue to make the minimum payments, except on the debt with the lowest balance, which is the one you will focus on paying off first.  Once you’ve paid off that first debt, you move to the next debt with the lowest balance.  This method assumes you’ll find it easier to stay motivated when you’re rewarded more quickly with the elimination of individual debts.

Avalanche method – Instead of listing debts by amount owed, this philosophy has you prioritizing your debts by interest rate, starting from highest to lowest.  You will end up paying less interest and eliminating your debt-load more quickly by tackling your debts by interest rate, so long as you can remain committed without the psychological boost the snowball method offers.

Tax-advantaged loans last – Depending in your income, if you itemize on your tax return you may be able to deduct the interest paid on student loans, mortgages and other select debts.  If you benefit from these deductions, consider paying off these loans last.

3. Plan for emergencies

Everyone should have an emergency fund, but what that means is different for every situation.  Dual-income families, those who spend far less than they make, and renters may be comfortable with just a $1,000 buffer in their checking account.  Homeowners, single-income families, and those with unstable or commission-based jobs, may want to have more set aside.

Make sure you have adequate renter’s or homeowner’s insurance and expensive items like jewelry, electronics and art are covered. Also make sure your health insurance fits your individual needs. Everyone needs at least a basic policy that will cover catastrophic injury or illness.  Women planning to get pregnant, families with children, and individuals with a family-history of disease or chronic healthcare needs should consider a policy with better benefits.  And if your employer offers them, take advantage of flex spending, health savings or health reimbursement accounts.  My generous employer offers extra HRA dollars for documenting healthy activities, most of which I’m already doing!

If you have dependents who rely on your income, such as a spouse or children, it’s imperative you have term life insurance, ideally for an amount that equals ten times your annual income or more.  If you have kids, consider how you plan to handle their higher education when choosing the term.

Be prepared for weather and safety emergencies.  We keep $100 cash in our safe, along with important documents should we need to evacuate or take cover from a tornado.  This year, I invested in a survival kit fromWise Company (along with peace of mind I also got 8% cash back by buying through MrRebates.com).

4. Start saving

If you’re in your 20s or 30s and your employer offers a retirement match, contribute the minimum required for the match, even if you’re still working on paying-off high interest credit card debt. With compounding interest, that investment has the potential to double every decade between now and retirement. Plus, free money.

After you’ve eliminated any high interest credit card debt, increase your retirement savings by opening a ROTH IRA.  The benefit of a ROTH is since you’ve already paid taxes on the amount you’re contributing today, withdrawals at retirement will be tax free.  Vanguard and Fidelity are popular low-fee brokerage companies, and accounts are easy to open from the comfort of your couch.

After you’ve started funding your future, you can begin saving for the short term.  Avoid getting back into debt by saving for life events, whether your plan is buying a bungalow, starting a family or spending a week sunning in Santorini.

If buying a house or condo, you can avoid the extra expense of private mortgage insurance (PMI) by putting at least 20 percent down.  Don’t push pause on your retirement savings to achieve your dream of home ownership.  If you do the math, you may find you come out ahead in the long-run by putting that money in the market and paying a little PMI.

5. Commit to learning more about personal finance

Develop your knowledge about and interest in personal finance by reading books, blogs and listening to podcasts about money.  While I disagree with many of his principles and recommendations, the Dave Ramsey podcast is a good source for inspiration and success stories.  I also follow a blogroll that includes Power Over Life, Think Save Retire, and Frugal Woods.

Find a community you can learn from and that will help keep you accountable.  If you’re not comfortable sharing with friends and family IRL, join a forum like those at Mr. Money Mustache or Bogleheads.  Social media is also a great resource for connecting with personal finance bloggers and others with the same money goals as you.

Improving how you manage money in 2017 will change the rest of your life.  Raise a glass and toast to a better financial future.  Cheers!

Donate Generously, Without Spending a Dime

This season of thanksgiving gives us a dedicated time to reflect on our blessings, and give back to those in need.  Red kettles and bell ringers greet you at every store and year-end solicitations start filling your inbox and mail box.  But instead of giving them your loose change, here are a few ways you can be the change:

Gift the gift of time.  Find an organization and mission that speaks to your heart and use your talents contribute to their cause.  Cook and serve meals, teach a computer class, mentor at-risk youth, or help rebuild neighborhoods.  And don’t forget to log your mileage when driving to and from volunteering, which you can deduct on your taxes if you itemize.

Collect travel toiletries to give to a shelter or your local Ronald McDonald House for use by families away from home and in the hospital with a sick or injured child.  I never use hotel lotion, but it’s one of the items most coveted by those who are homeless and spend all four seasons out in the elements.  Shampoo, soap, conditioner, combs, cotton swabs and toothpaste are also appreciated.

Use coupons combined with sales to pay pennies for non-perishables and hygiene products to donate to food banks.  Look for deals on diapers, baby food and formula, items which are less frequently donated but are always needed.

Give blood or donate plasma.  Before I started working in health care, I thought blood transfusions were just for blood loss due to injuries or surgical procedures, but cancer patients, those with severe infections and other life-threatening ailments may also need their blood supply replenished.  And consider joining the national bone marrow registry.

If you can’t sell it on eBay or Craig’s List, donate it.  No matter the condition, there’s never a need to send your old outfits, books and home goods to the landfill.  Donated paperbacks that won’t sell or clothes no longer wearable are frequently sold to textile recyclers and eventually be resurrected as industrial products or trendy new apparel with hipster appeal.  Not only are you helping others and saving the planet, but you can also include in-kind donations among your charitable deductions when you itemize on your tax return.

Ebates and Mr. Rebates only offer cash back on Amazon purchases from select departments.  If your purchase isn’t one of those rotating departments, consider logging-on via AmazonSmile.  By using this portal, Amazon will donate 0.5% of the sale price to your charity of choice.  You can log-into AmazonSmile using your Prime membership, and don’t forget to use the MileagePlus X app to earn United miles by first buying an Amazon gift card before checking out.

There are lots of ways you can make a difference in the lives of others besides making a financial contribution.  This holiday season and all year long, do what you can to make the world a little better and a little brighter for those less fortunate.