Learn How to Not Be Broke Again Three Years from Now!
Hello! David J. here again with more of the steps on my journey to financial independence.
When last we met, we started discussing what to do with lottery winnings, a big bonus, profits from a real estate deal, or some other large sudden windfall of cash. Even if you're only starting out with your own savings, these steps can help you protect and grow your savings into income for your retirement.
If you haven't seen the first part of this discussion yet, take a look at that, then continue here. Or, go back and review it if you have seen it, then come back here and we'll finish up.
Today, we'll continue our discussion with Steps 3 and 4.
I am blessed to be connected to a group where financial education is available - education of a calibre about which the average college student can only dream. This is from my learning, not my experience.
I'm going to propose a four(4) step process:
Step 1: Asset Protection
Step 2: Debt Reduction
Step 3: Income Production
Step 4: Wealth Preservation
Note that I am not a licensed financial professional and am NOT authorized or qualified to give financial advice. This is, again, from what I've been learning. Please take it as such.
I may cite numbers over the course of what follows. Please do not take them as either accurate or "gospel". I'm typing this entirely from memory - what I've learned as I understand and remember it.
We resume our discussion at Step 3.
Step 3: Income Production
After Step 2, you should still have the bulk of your new found wealth remaining. Here, we begin to create our new reality with it.
There are many vehicles available for income production. One of them is money lending. Most folks think that's just the province of wealthy bankers. History shows that, traditionally, this is not the case and that one of the ways people build wealth from modest holdings is by "renting out" their money.
It will help here to acquire some small understanding of how banks work in the 21st Century.
Banks don't actually lend out their depositors' money. Instead, the amount of money they have on deposit determines how much they can borrow from "the Fed", usually at a ratio of circa nine(9) to one. That is, for every dollar they have on deposit, they can borrow nine(9) dollars from the Fed. Sometimes, the ratio can be as high as eleven(11) or more to one. So The Fed's money is partially secured. Think of it this way: as a bank's depositor, you make the "down payment" on the loan the banks get so they have money they can lend out. This is the TRUE meaning of, "It takes money to make money."
The Fed charges the banks interest at a very low rate - on the order of 0.25% - relative to what banks charge each other for borrowing ("the prime rate") or what the banks charge to individual consumers who borrow from the bank - circa 4% to 5% for secured loans, and anywhere up to 30%+ for credit cards and other unsecured loans.
The banks borrow from "the Fed" at a very low interest rate, and lend it out to borrowers at much higher interest rates. This is sometimes called "arbitrage".
So, you will want to emulate the bank's model. That is, "arbitrage" your money: lend it out for more interest than you're paying on your combined debt load.
These investments will, therefore, be short-term investments - six(6) months or so, generally not more than twenty-four(24) months, though some loans may go longer.
A premier option for income production is self-directed tax-advantaged accounts like IRAs, 401(k)s and 403(b)s. Genuine self direction allows that you can direct your custodian to invest your funds in any non-prohibited transaction as defined by the U.S. Tax Code - the "I.R.S. Code".
Some examples of these investments would be a sibling's business, a nephew's financial endeavor, an associate's real estate deal (fix and flip, rehab, etc.), and so on.
Note that I specifically did NOT mention stocks or other "risky" investments. Most folks do not consider the stock market to be inordinately risky. These are some of the same folks who lost half or more of their retirement savings in the crash of 2008 / 2009.
Prohibited transactions are generally those which would benefit you personally, directly. This includes your own real estate deals and financial endeavors, those of your spouse or those of your parents, grand-parents, children, grand-children, etc. ... that is, anyone in a direct line of descendency from you or to you.
Your tax attorney, accountant or other financial professionals as well as your custodian should be able to help you avoid prohibited transactions. You may need to shop around for people sufficiently knowledgeable to assist you in these regards.
Money held in accounts without such retrictions CAN be used to invest in vehicles which WILL benefit you personally. So that's an option for lottery winnings and other sudden windfalls.
Something I would advise against is having dealings with anyone who will benefit financially from any transaction you may make even if you lose money on the transaction. Such people make their money by handling those transactions for you and are not motivated to help you make a profit. Apologies to any financial planners, stock brokers, etc. who may feel slighted by those remarks. No personal attack or offense is intended.
Step 4: Wealth Preservation
This where most lottery winners make their mis-steps and end up broke again in short order: they fail to distinguish between short term gains, and long term income and wealth preservation. Many people buy into the notion that, "If I could just get ahead I could stay ahead".
Wealth preservation is not about spending, it's about having your money working for you instead of you working for money.
Really, wealth preservation becomes a product of Income Production. The idea is to have your income-producing assets increase in value to the point that your income stream is assured for as long you can reasonably expect to need it. They should produce income in excess of your needs so their value increases over time in turn producing greater income to keep pace with inflation and your own needs, which may increase as you age and your health requires more and more attention.
It's not my goal here to suggest income producing assets, though one vehicle I've already mentioned in passing - being a private money lender - can be a strong part of any such strategy. Income producing real estate is another example. Among those who have achieved financial independence - the topic of this blog, the most common "denominator" is wealth produced through real estate holdings.
In summary...
Whether you win the lottery, inherit a fortune or sell a fix-and-flip or rehabbed home for a big profit, your wealth strategy cannot begin with "avenging" all the years of deprivation you've felt being a member of the workforce.
Your wealth strategy has to begin with protection, continue through growth and through debt reduction and be anchored in preservation and income production for as long as you need it.
Re-invest your profits to keep the value of your business growing.
We'll talk again soon!
Take care - be well!
Much Success!
Sunday, June 29, 2014
Sunday, June 22, 2014
Won the Lottery?
Learn How to Not Be Broke Again Three Years from Now!
Hello! David J. here again with more of the steps on my journey to financial independence.
Was just watching a show on Cable called, "The Lottery Changed My Life". This episode featured a Canadian family who won a fairly modest jackpot, $4.5 million.
Like most lottery winners, they first fed their feelings of deprivation by going out and indulging in luxuries like cars, outdoor recreational vehicles like ATVs and such, even a country home on multiple acres.
Something you never hear on these shows, though, is what they did to preserve their "wealth" after first satisfying their needs to no longer feel "deprived". So, I thought I'd fill in here with some suggestions.
Now, of course, I'm not a big lottery winner, and my personal fortune is still "under construction".
I am blessed, however, to be connected to a group where financial education is available - education of a calibre about which the average college student can only dream. So, this is from my learning, not my experience.
I'm going to propose a four(4) step process:
Step 1: Asset Protection
Step 2: Debt Reduction
Step 3: Income Production
Step 4: Wealth Preservation
Note that I am not a licensed financial professional and am NOT authorized or qualified to give financial advice. This is, again, from what I've been learning. Please take it as such.
I may cite numbers over the course of what follows. Please do not take them as either accurate or "gospel". I'm typing this entirely from memory - what I've learned as I understand it.
Step 1: Asset Protection
Upon any large burst of income or any windfall, the first thing to have in place is a plan for asset protection. As soon as you acquire something that someone else may want to take away, you need to put yourself in a position of control without the appearance of possession. That is, if someone wants to try and sue you to gain control of your wealth, you must first have put that wealth out of reach of such attempts.
On paper, you must look like you have nothing of value - nothing worth suing you for.
Control does not require possession. "Control everything, own nothing".
Step 2: Debt Reduction
When we get a sum of money like an inheritance or a bonus or some other payout, one of the first things many folks always want to do is to pay off debt.
Now, that IS a good thing. The trick, however, is to pay DOWN debt, and do it without imposing a sudden big change on your credit position.
By paying down big balances all at once, you actually paint a picture of yourself which, while it may appear to help you in the short term, in the long term may actually hurt your credit profile. Sure, your scores will surge upward, initially. However, they'll gradually slide back down if you stop using your credit and interrupt your history of payments. Your scores may end up being lower than before you acquired your windfall.
What you'll want do first is devise a pay-down plan for your personal unsecured debts like credit cards and personal credit lines. Exclude your home equity line for now - we'll discuss that later, and its a secured debt, anyway.
You'll need a financial calculator. One recommendable option is the official HP 10B-II emulator app for the iPhone, or the HP 10B-II calculator itself or its predecessor, the HP 10B. Actually, any calculator that handles financial calculations should do nicely. You'll be figuring out the payment amounts to pay down or pay off your personal credit accounts over a period of time which you decide.
For each account, calculate the payment amount for the time period you've decided for paying down your personal debts: 24 months (2 years), 36 months (3 years), 60 months (5 years), or whatever you choose. Use the current interest rate on each account, even if the interest rate is variable. At this writing, there is little indication of interest rates changing much in the near term (within five years) - subject to change, of course, since no one can predict the future.
Once you have the monthly payment amount for each account, multiply that times the number of monthly payments you've selected. Total all these numbers for all your accounts. This will be the amount you'll set aside for debt reduction and elimination.
What you want do so is set up all your personal credit accounts so that they get paid automatically every month out of a special account you set up just for that purpose. Actually, you will want two accounts: a money-market or other interest bearing account which pays more than an interest-bearing checking account would, and an interest bearing - or truly free - checking account.
Start the new checking account with the minimum balance to avoid monthly charges (if any) plus the total of a month's payments on your personal credit accounts.
Set up the money-market or other interest bearing account with the total of all the monthly payments, and arrange to have it transfer to the new checking account an amount equal to the total of your monthly personal credit account payments every month. Money-market and other interest bearing accounts usually have a monthly transaction count limit; so, this should work well - one withdrawal per month set up on an automatic transfer to your new checking account. Leave the money in this account solely for the purpose of funding those automatic transfers and making the automatic payments.
Some banks allow you to set up these automatic transfers through your on-line banking. Contact your institution for details if you need them.
That said, I must also say that I don't promote paying cash for some large purchases when credit will do just as well if not better. Remember: money you don't pay out until necessary is money that can work for you earning income.
So, for any new large purchases do the same thing: figure out how soon you want to pay it off, figure the monthly payment amount at that rate, the total number of payments and the total of all those payments. Add that amount to your money-market or other interest bearing account, and set up those monthly payments to be automatically drawn from your new checking account every month. Adjust the monthly transfer from your money-market or other interest bearing account to your new checking account, as needed.
Every month, the interest earned in your money-market or other interest bearing account can be transferred to another account and used to re-invest or fund purchases. This is an early example of income production - your money working for you, instead of you working for money.
The idea here is not to avoid interest, as most consumers might believe. The idea here is to repair and maintain your credit by setting up timely payments and reduce your credit utilization. This will enable you to get lower interest rates on new accounts, or even to reduce the interest rates on existing accounts.
As for home loans and home equity lines, I'm going to promote the same approach: as long as the interest you're paying on those accounts is less than the income you're making (as we'll discuss next), leave those loans in place and include them in your debt reduction plan. Leave their payoff term as is - 15/30 year or whatever, just allow for the automatic monthly payments which will grow your credit standing and repair your credit profile, if needed.
If your equity line's monthly payments are interest only, use your financial calculator to determine a payment which will amortize that line before it renews or resets the next time (not the current period, unless it just renewed/reset).
If your home equity line is a true "balloon" and does not renew or reset, then consider paying it off in full, if possible.
I've intentionally avoided mentioning transferring your debts into business entities for the obvious reason that I believe it is better for you personally to improve and fortify your own credit status so that you may more easily acquire credit for any business entity you may choose to set up.
It's entirely valid to transfer your windfall into one or more business entities - that could be part of your asset protection plan. All you need do, then, is to have that(those) entity(-ies) make your monthly payments for you.
That said, I would recommend you consider transferring your personal residence out of your personal name and into an entity such as a trust. Your legal professional should be able to help you do this. This further reduces your desirability as a lawsuit target. In fact, depending on your unsecured debts, it will probably push your net worth into negative territory.
You shouldn't feel negative about that - remember: the idea is to look as unattractive as possible as a potential lawsuit target.
*Whew*! This is getting a bit long! Let's break here, and continue in the next post!
Look for it in a week or so.
We'll talk again soon!
Take care - be well!
Much Success!
Hello! David J. here again with more of the steps on my journey to financial independence.
Was just watching a show on Cable called, "The Lottery Changed My Life". This episode featured a Canadian family who won a fairly modest jackpot, $4.5 million.
Like most lottery winners, they first fed their feelings of deprivation by going out and indulging in luxuries like cars, outdoor recreational vehicles like ATVs and such, even a country home on multiple acres.
Something you never hear on these shows, though, is what they did to preserve their "wealth" after first satisfying their needs to no longer feel "deprived". So, I thought I'd fill in here with some suggestions.
Now, of course, I'm not a big lottery winner, and my personal fortune is still "under construction".
I am blessed, however, to be connected to a group where financial education is available - education of a calibre about which the average college student can only dream. So, this is from my learning, not my experience.
I'm going to propose a four(4) step process:
Step 1: Asset Protection
Step 2: Debt Reduction
Step 3: Income Production
Step 4: Wealth Preservation
Note that I am not a licensed financial professional and am NOT authorized or qualified to give financial advice. This is, again, from what I've been learning. Please take it as such.
I may cite numbers over the course of what follows. Please do not take them as either accurate or "gospel". I'm typing this entirely from memory - what I've learned as I understand it.
Step 1: Asset Protection
Upon any large burst of income or any windfall, the first thing to have in place is a plan for asset protection. As soon as you acquire something that someone else may want to take away, you need to put yourself in a position of control without the appearance of possession. That is, if someone wants to try and sue you to gain control of your wealth, you must first have put that wealth out of reach of such attempts.
On paper, you must look like you have nothing of value - nothing worth suing you for.
Control does not require possession. "Control everything, own nothing".
Step 2: Debt Reduction
When we get a sum of money like an inheritance or a bonus or some other payout, one of the first things many folks always want to do is to pay off debt.
Now, that IS a good thing. The trick, however, is to pay DOWN debt, and do it without imposing a sudden big change on your credit position.
By paying down big balances all at once, you actually paint a picture of yourself which, while it may appear to help you in the short term, in the long term may actually hurt your credit profile. Sure, your scores will surge upward, initially. However, they'll gradually slide back down if you stop using your credit and interrupt your history of payments. Your scores may end up being lower than before you acquired your windfall.
What you'll want do first is devise a pay-down plan for your personal unsecured debts like credit cards and personal credit lines. Exclude your home equity line for now - we'll discuss that later, and its a secured debt, anyway.
You'll need a financial calculator. One recommendable option is the official HP 10B-II emulator app for the iPhone, or the HP 10B-II calculator itself or its predecessor, the HP 10B. Actually, any calculator that handles financial calculations should do nicely. You'll be figuring out the payment amounts to pay down or pay off your personal credit accounts over a period of time which you decide.
For each account, calculate the payment amount for the time period you've decided for paying down your personal debts: 24 months (2 years), 36 months (3 years), 60 months (5 years), or whatever you choose. Use the current interest rate on each account, even if the interest rate is variable. At this writing, there is little indication of interest rates changing much in the near term (within five years) - subject to change, of course, since no one can predict the future.
Once you have the monthly payment amount for each account, multiply that times the number of monthly payments you've selected. Total all these numbers for all your accounts. This will be the amount you'll set aside for debt reduction and elimination.
What you want do so is set up all your personal credit accounts so that they get paid automatically every month out of a special account you set up just for that purpose. Actually, you will want two accounts: a money-market or other interest bearing account which pays more than an interest-bearing checking account would, and an interest bearing - or truly free - checking account.
Start the new checking account with the minimum balance to avoid monthly charges (if any) plus the total of a month's payments on your personal credit accounts.
Set up the money-market or other interest bearing account with the total of all the monthly payments, and arrange to have it transfer to the new checking account an amount equal to the total of your monthly personal credit account payments every month. Money-market and other interest bearing accounts usually have a monthly transaction count limit; so, this should work well - one withdrawal per month set up on an automatic transfer to your new checking account. Leave the money in this account solely for the purpose of funding those automatic transfers and making the automatic payments.
Some banks allow you to set up these automatic transfers through your on-line banking. Contact your institution for details if you need them.
That said, I must also say that I don't promote paying cash for some large purchases when credit will do just as well if not better. Remember: money you don't pay out until necessary is money that can work for you earning income.
So, for any new large purchases do the same thing: figure out how soon you want to pay it off, figure the monthly payment amount at that rate, the total number of payments and the total of all those payments. Add that amount to your money-market or other interest bearing account, and set up those monthly payments to be automatically drawn from your new checking account every month. Adjust the monthly transfer from your money-market or other interest bearing account to your new checking account, as needed.
Every month, the interest earned in your money-market or other interest bearing account can be transferred to another account and used to re-invest or fund purchases. This is an early example of income production - your money working for you, instead of you working for money.
The idea here is not to avoid interest, as most consumers might believe. The idea here is to repair and maintain your credit by setting up timely payments and reduce your credit utilization. This will enable you to get lower interest rates on new accounts, or even to reduce the interest rates on existing accounts.
As for home loans and home equity lines, I'm going to promote the same approach: as long as the interest you're paying on those accounts is less than the income you're making (as we'll discuss next), leave those loans in place and include them in your debt reduction plan. Leave their payoff term as is - 15/30 year or whatever, just allow for the automatic monthly payments which will grow your credit standing and repair your credit profile, if needed.
If your equity line's monthly payments are interest only, use your financial calculator to determine a payment which will amortize that line before it renews or resets the next time (not the current period, unless it just renewed/reset).
If your home equity line is a true "balloon" and does not renew or reset, then consider paying it off in full, if possible.
I've intentionally avoided mentioning transferring your debts into business entities for the obvious reason that I believe it is better for you personally to improve and fortify your own credit status so that you may more easily acquire credit for any business entity you may choose to set up.
It's entirely valid to transfer your windfall into one or more business entities - that could be part of your asset protection plan. All you need do, then, is to have that(those) entity(-ies) make your monthly payments for you.
That said, I would recommend you consider transferring your personal residence out of your personal name and into an entity such as a trust. Your legal professional should be able to help you do this. This further reduces your desirability as a lawsuit target. In fact, depending on your unsecured debts, it will probably push your net worth into negative territory.
You shouldn't feel negative about that - remember: the idea is to look as unattractive as possible as a potential lawsuit target.
*Whew*! This is getting a bit long! Let's break here, and continue in the next post!
Look for it in a week or so.
We'll talk again soon!
Take care - be well!
Much Success!
Sunday, June 15, 2014
A Return to Blogging
Hello! David J. here again with more of the steps on my journey toward financial independence.
Well! It's been a while since last we met! Let me fill you in on what's been going on...
"Life Happens", it is said, and my life is certainly no different. Over the course of the past year - my last blog post was just about a year ago, I've been continuing to study my real estate investing and entrepreneurial classes, including the weekly study groups held at the office of the local group of investors and entrepreneurs with which I am connected.
Discussing the class material with others taking the same classes has been very helpful and has helped to reinforce both the class material and its relationship to my own life experiences in investing, sparse as they have been to this point.
Personally and professionally, my occupation in IT is actually reinforcing my choice to pursue entrepreneurialism. In fact, it has become abundantly clear that remaining a W2 employee is no longer an option for me. I've become what some folks call, "unemployable".
While I would not promote being financially irresponsible, I could easily see making my career change now, before my new income production systems are ready to "boot up". My current financial commitments, however, do not permit me that choice. So, I will continue my path of work and study while I develop my new income source.
The time to make the break is not yet, but is not far away now! I'm very much looking forward to the day when I can walk into the boss's office and say, "(Boss), I'm sorry man, but I gotta let ya go - you're costing me a fortune!".
That said, sit back, relax and watch for a new post to be published very soon. It's already written, it just needs a few points to be researched and confirmed before I release it to the world.
Sneak preview: The next post is rather long, and it contains information that can be helpful to anyone who suddenly acquires a large income or bonus, an inheritance or even a big lottery jackpot. After all, the Law of Attraction is all about being ready for good things so when they come your way, you'll be ready and they won't have to pass you by!
Thanx for coming back! There's good things coming, and you're welcome to be part of them with me!
We'll talk again soon!
Take care - be well!
Much Success!
Well! It's been a while since last we met! Let me fill you in on what's been going on...
"Life Happens", it is said, and my life is certainly no different. Over the course of the past year - my last blog post was just about a year ago, I've been continuing to study my real estate investing and entrepreneurial classes, including the weekly study groups held at the office of the local group of investors and entrepreneurs with which I am connected.
Discussing the class material with others taking the same classes has been very helpful and has helped to reinforce both the class material and its relationship to my own life experiences in investing, sparse as they have been to this point.
Personally and professionally, my occupation in IT is actually reinforcing my choice to pursue entrepreneurialism. In fact, it has become abundantly clear that remaining a W2 employee is no longer an option for me. I've become what some folks call, "unemployable".
While I would not promote being financially irresponsible, I could easily see making my career change now, before my new income production systems are ready to "boot up". My current financial commitments, however, do not permit me that choice. So, I will continue my path of work and study while I develop my new income source.
The time to make the break is not yet, but is not far away now! I'm very much looking forward to the day when I can walk into the boss's office and say, "(Boss), I'm sorry man, but I gotta let ya go - you're costing me a fortune!".
That said, sit back, relax and watch for a new post to be published very soon. It's already written, it just needs a few points to be researched and confirmed before I release it to the world.
Sneak preview: The next post is rather long, and it contains information that can be helpful to anyone who suddenly acquires a large income or bonus, an inheritance or even a big lottery jackpot. After all, the Law of Attraction is all about being ready for good things so when they come your way, you'll be ready and they won't have to pass you by!
Thanx for coming back! There's good things coming, and you're welcome to be part of them with me!
We'll talk again soon!
Take care - be well!
Much Success!
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