Dollar cost averaging is a very simple, yet very effective approach to investing. Dollar cost averaging is a long term investing strategy that is implemented by investing a fixed amount of money into the same stock or fund over a period of time.
A common saying among investors in support of dollar cost averaging is “time in the market beats timing the market.” The idea behind this saying is that investing in the market over a long period of time will outperform attempts at trying to make perfect trades by buying at the lows and selling high. No one truly knows when the market is low or high. This means that you are losing opportunity by not being in the market sooner. The market is unpredictable and by using this method you greatly reduce your risk. Chances are, if you contribute to a 401k, 457b, 403b or similar employer sponsored retirement plan, you are already implementing a dollar cost averaging strategy, unless you are switching funds frequently.
How To Implement a Dollar Cost Averaging Strategy
There are typically a few ways that a dollar cost averaging strategy is used. As talked about previously, your retirement plan at work is likely dollar cost averaged. You contribute a certain amount into your 401k, for example, every week, bi-weekly or maybe even monthly. Another example would be maxing your Roth IRA each year with one lump sum contribution. This is dollar cost averaging on an annual basis rather than per pay period like your 401k might be, but the premise is the same.
Similarly, you may contribute to an individual account in which you manually invest money weekly, bi-weekly, monthly, etc. Assuming you put money into the same funds/stocks on a regular basis this is another form of dollar cost averaging. Even automatically reinvested dividends could be considered dollar cost averaging. This would typically be on a quarterly basis.
Another commonly used application is when one has a lump sum of money they want to invest. Rather than investing all the money at once, they will invest the money across periodic intervals. This tends to make people feel like they are lessening their risk, but as we will talk about later on it may be counterintuitive.
Dollar Cost Averaging: In Practice
Dollar cost averaging allows you to purchase more shares when the price is low and fewer shares when the price is high. This gives you an average price per share somewhere in the middle.
Let’s use our friend Tom as an example. Tom is a new investor and has decided to start investing on January 1st. Tom will invest $1,500 per month, on the first of each month, into an index fund called ABC. Looking forward six months, the price of ABC on January 1st is $50, February 1st – $54 dollars, March 1st – $42 dollars, April 1st – $45 dollars, May 1st – $46 dollars and on June 1st – $53 dollars.
Each month Tom’s $1,500 would have bought a different number of shares.This is due to the difference in share price.
To calculate how many shares Tom can purchase each month we will divide the amount invested by the price of the shares at the time. Here’s the math for January: $1,500 invested / shares of ABC at $50 each = 30 shares.
January – 30 shares, February – 27.78 shares, March – 35.71 shares, April – 33.33 shares, May – 32.61 shares and June – 28.30. After six months, Tom would own a total of 187.73 shares of ABC with an average cost of $47.94 per share ($9,000 invested / 187.73 total shares = $47.94). He invested a total of $9,000 that is now worth $9,949.69.
It is important to note that this example worked out favorably for Tom because of the overall increase in share price of our hypothetical fund called ABC. Dollar cost averaging does not reduce the risk associated with a market decline. It can though, potentially increase the performance of an investment, providing the price of the investment increases over time. This is why dollar cost averaging the entire market, or more likely a fund that tracks the market, which has historically gone up over time, is a popular strategy.
Potential Drawbacks
There are a few potential drawbacks to a dollar cost averaging strategy. The first potential drawback to dollar cost averaging is the possible loss of gains. For example, if Tom could have predicted the future and invested the entire $9,000 on March 1st when the shares were the lowest, he would have seen a $2,356.84 gain by June 1st. Conversely, if he had invested the entire $9,000 on February 1st when the shares were the highest, he would have seen a loss of $163.49. This drawback is only relevant if you are successfully able to buy and sell at the perfect time. Unfortunately, most of us don’t have the ability to see the future.
The next potential drawback is the potential for increased broker fees by making more trades. There are many low cost brokerages and more and more that offer free trades out there, making this much less of an issue than it once was.
Lastly, the reason that dollar cost averaging makes sense is the same reason that it might not. The idea is that the market will go up over time so buying over consistent time periods will allow you to capitalize on this. By not investing as much as you can, as soon as you can, you are, in theory, allowing the market to rise before investing more. This really only applies when dollar cost averaging a lump sum of money though. You can’t invest money that you don’t have.
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Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
The first half of 2021 has been great for my rental properties. There are no new deals on the horizon for me at the moment but hopefully that will change soon. I’m working on refinancing North, East and possibly South but there are a few variables. One being flood zones which would require flood insurance and the next is if we keep South as it is currently for sale. I’ll have some more info on the refinances next quarter. Here’s last quarters update if you missed it.
Property 1 – Owner Occupied Two Family
I’ve owned and owner occupied this two-family since 2017. All things considered, this property has been great to me. I purchased the property for $75,000 and put 20% down. In late 2019, I was able to get a HELOC on this property for just over $40,000. Here’s the spreadsheet for the first half of 2021 below:
Looking at the spreadsheet, you can see that the expenses got pretty crazy this quarter. I’ve been extremely busy with this place. I put up a fence, built a carport off the garage, replaced all the basement windows, replaced the last of the windows in my unit, installed french doors, built a deck, painted the exterior of the house and garage, built a storage room in the basement along with some other stuff. All of this made this place much more expensive to own for the past half year, but it’s also made it much nicer and more functional. Also, it will alleviate some work for me to do when I move out.
It has cost me an average of $1,032.00 per month to owner occupy this house so far during 2021. Although, I paid $126.26 towards the principal on the mortgage in January and February. I could have owner occupied this house for $989.92 per month without those extra payments. Regardless, this is extremely high. I’ve averaged around $300/month for the past four years.
If/when I were to move out, I would rent my apartment for around $850, still leaving me in the negative based on the first half of this years numbers. I still have some projects to finish up and that means more money to spend, but it’s quickly coming to an end for this year. I have some bigger interior projects I’d like to get done in my unit before I move out of here but that will likely get pushed to next year.
Property 2 – “Cool” Two-Family
I just closed on this property in February 2021. The purchase price was $115k and I put 25% down. I will be referring to this two-family as the Cool property. Here’s the spreadsheet for the first half of 2021 below:
Being the first full quarter that I’ve owned this property, I’m not really sure that I could ask for a better outcome. I’ve had zero issues with the property or the tenants. Cash flow looks awesome so I really can’t complain.
As you can see, this property has earned an average of $468.83 per month so far during 2021. The bigger three bedroom unit is pretty solid but will certainly need some work whenever the tenants move out. I’m not too worried about that unit.
The smaller two bedroom unit is going to need a total refresh whenever the current tenant moves out. The plus side is that the rent will be much higher at that point, at least $200/month more.
Property 3 – “East” Two-Family
We refer to this two-family as the East property. This is the first of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s the spreadsheet for the first half of 2021 below:
Another great quarter for this property. I finally feel like the work and time spent on this property is finally paying off. We just haven’t been able to manage a good year out of this place since purchasing it. This year has been phenomenal so far. The expenses in May came from replacing a kitchen faucet and in June from installing a hose spigot on the opposite side of the house per tenant request.
The property has earned an average of $675.58 per month so far during 2021. I don’t want to jinx it, but this may finally be the first great year for this property.
Property 4 – “North” Three-Family
We refer to this two-family as the North property. This is the second of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s the spreadsheet for the first half of 2021 below:
So far so good here. No issues, no changes. Just another phenomenal quarter for this property.
The property has earned an average of $660.12 per month so far during 2021. This property has done great year after year and I see no reason why it won’t continue to do so.
Property 5 – “South” Two-Family
We refer to this two-family as the South property. This is the third of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $50,000 and put 0% down. Here’s the spreadsheet for the first half of 2021 below:
This is the property that we had for sale. It is temporarily (?) off the market. This property has done great up to this point in the year. Unfortunately, things aren’t going to stay that way for us.
One of the tenants gave his notice and will be moving out by August 1st. His apartment will need to be gone through entirely. This means time, money and no rent coming in during that time. We are planning to finish, or at least get close to finishing, the apartment to decide whether or not we want to keep the property or put it back on the market. If we decide to keep the property, we will rent this unit and hopefully get back on track for the year. If we decide to sell the property, we will leave it vacant until it sells.
This property has cash flowed $635.47 per month so far during 2021. We’ll be losing $800 per month in rent for as long as it’s vacant on top of all the materials we’ll purchase.
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Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
This has been a BUSY quarter for me. I put up a fence, installed french doors, changed a bunch of windows, painted the fence, my garage and entire house, built a car port and a bunch of other little things.
All of this was done at my owner occupied rental property. When I bought this house and moved in four and a half years go, I figured I would move out in a year or two. As it turns out, it’s not only really convenient to live here for a few different reasons but the current state of the market makes it difficult to buy anything else. My new plan is to make this place as comfortable as possible until I do move. On top of that, I want to be sure that when I am ready to move I don’t have any remaining projects to finish here and I can seamlessly transition into the new place.
If you caught last quarters update you’ll remember that I was talking about possibly purchasing a single family house from my friends father. As you can probably expect from all the work I’ve done here, that fell through.
I like to calculate my FI (Financial Independence) ratio in two parts. The first part being passive income vs. necessary expenses. The second part being passive income vs. total expenses. The first calculation makes sense because I know that I could cut all, or most, of my unnecessary expenses if I had to, this is often referred to as “Lean FI.” The second calculation makes sense because this level of FI would require no changes to my every day life and I could continue living exactly as I am now. The purpose of these calculations is to determine how close to financial independence I am.
Passive Income vs. Necessary Expenses
$16,860.41 / $20,712.87 = .814 x 100 = 81.40%
This 81.40% means that my passive income for the first half of 2021 was ~19% short to cover my necessary expenses.
I anticipated being well over 100% by this time this year. I’ve spent a ton of money on my owner occupied rental property this year. None of the things that I’ve done were immediately necessary and some were completely unnecessary but I funnel any house related costs into my necessary category within my budget. On top of that, I sold my truck and bought a different one. This swap wasn’t entirely necessary either but transportation as a whole is. Regardless, I still have time to exceed 100% this year.
In terms of dollars, this 19% amounts to about $642 per month that I was lacking in order to afford all my necessary expenses without working.
Passive Income vs. Total Expenses
$16,860.41 / $26,212.02 = .6432 x 100 = 64.32%
This 64.32% means that I was about 36% away from being able to afford ALL of my expenses for the first half of 2021 without needing to work.
This ~36% amounts to about $1,558 per month that I was lacking in order to afford all my expenses without working.
Net Worth +12.87% YTD
I’ve been tracking my net worth since 2016 and it’s both motivating and inspiring to see the progress I’ve made. I saw a 12.87% gain during the fist half of 2021. That puts me way ahead of schedule for my yearly goal of 18% and I certainly can’t complain.
I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you’re interested, use my link to sign-up here. (It’s free)
Example Personal Capital Dashboard
Total Amount Invested and Annual Savings Rate – $18,103.47 / 41.21% YTD
I have managed to invest $18,103.47 into the market so far this year. My goal for the year is $35,000. I’m currently on track to invest about $30,000. I’ll need to step it up to hit my goal for this year.
I’ve found that it’s extremely easy to invest money when it’s an automatic process. Trying to decide whether to invest more or save for another rental property is much more difficult, to me.
I have managed to save 41.21% of my net income so far this year. Calculating your savings rate is a great metric to track as it really opens your eyes to what an expensive month or two can do to an entire year of savings. That’s basically what’s happened to me this quarter. I’ve spent a ton of money and my savings rate is suffering because of it. I’m pretty much maxed out on the amount that I can comfortably save so any differences in savings rate mainly come from increases or decreases in spending. I still have some projects to complete but hopefully by the end of the year I can get back into the mid 50% range.
Goals For 2021
Financial
Invest $35,000 – Current: $18,103.47 / $35,000
Increase Net Worth by 18% – Current: 12.87% / 18%
Achieve a 60% Savings Rate – Current: 41.21% / 60%
100% FI Ratio (Total Expenses) – Current: 64.32% / 100%
It looks like the only financial goal that I’m solidly on track to achieve is an 18% net worth increase. Though, the market could tank and send this goal spiraling down with it, of course. I’ll mark my $35,000 invested and 100% FI ratio as possible for now. My 60% savings rate goal is still possible but I would have to dramatically change my plans for the year to achieve it. I’d still like to see 50%+ by the end of the year.
Fitness
Run 100 miles this year – Current: 28 / 100
Bench press 325lbs (@ ~175lbs bodyweight) – Best this year 315lbs @ 178lbs
Squat 365lbs (@ ~175lbs bodyweight) – Best this year 370lbs @ 178lbs
Deadlift 455lbs (@ ~175lbs bodyweight) – Best this year 365lbs @ 178lbs
I underwent surgery in April and that screwed up my fitness goals pretty badly. I’m way behind on all of these goals for the year (besides squats) and I’m way too busy right now to realistically expect to achieve any of these this year. I’ll get back after it soon.
Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
The more time you spend in the financial independence community the more you’ll see the term savings rate thrown around. It is almost viewed like a sort of trophy that we can use to prove to ourselves and others how dedicated we are to achieving FIRE. It can also be used as a tool that allows us to forecast the time required to reach FIRE.
The problem that often arises when comparing savings rates with others is the fact that each person may choose to calculate their savings rate differently. On the surface, it’s a very simple calculation. You just divide your savings by your income to arrive at a percentage of income saved.
Savings / Income = % Savings Rate
It is largely personal preference as to which factors are included in your savings rate calculation. On the income side of the equation, the debate is largely between using net or gross income. On the savings side of the equation, you have savings accounts, retirement accounts, employer match on those retirement accounts and even the portion of your mortgage payment (or other loan payments) that goes toward the principal of the loan.
Why Do We Calculate Our Savings Rate?
Why are all of us in the financial independence community borderline obsessed with our savings rate? Is it really that important?
The reason that we all love talking about our savings rate is that it allows us to create a timeline of when we will be able to retire. What it boils down to is the more money you are able to save, the sooner you will be able to retire.
The chart below illustrates just how impactful increasing your savings rate can be.
The math behind this chart assumes a few things. First, this assumes a starting net worth of zero and using net income for savings rate calculations (we’ll dive into this further). Second, you will earn a 5% inflation adjusted return. Third, you will use the 4% rule after retiring.
This is just a baseline to work off of, these assumptions will not work for everyone.
Abiding by our assumptions and looking at the chart, you can see that if you save 5% it will take you 66 years until you will be ready to retire. Up that 5% to 30% and you will cut your years to retirement down to 28 years. Up that 30% even further to 65% and you will cut your years to retirement down to 10.5 years.
Knowing how soon we can achieve financial independence is the driving factor behind the coveted savings rate calculations.
Calculating Savings
The first step needed to calculate savings rate is to determine your savings. To do this we need to decide which pieces should be considered in these calculations.
The easiest piece is, well, plain old savings. This could be money that goes into a savings account, checking account, cash, etc.
The next piece is money that goes into retirement accounts. This includes pre-tax retirement accounts as well as post-tax.
This is where things begin to become personal preference. Retirement account contributions made by an employer could be included as savings. If you decide to count employer contributions as savings you should also count them on the income side as well. This will give you a more accurate savings rate. Here’s a few example scenarios in which Mary’s savings rate is calculated based only on her 401k. This means she is saving zero dollars anywhere else. This is probably not very likely, but it demonstrates the difference in savings rate percentages quite well.
Scenario 1: No Employer Contribution
Mary’s net income is $75,000 and she contributes $19,500 to her 401k. Her savings rate would be $19,500 / $75,000 = 26%.
Scenario 2: $5,000 Employer Contribution Added Only to Savings
If she counted her employer’s contributions to her 401k on the savings side and not the income side her savings rate would be $24,500 / $75,000 = 32.67%.
Scenario 3: $5,000 Employer Contribution Added to Both Savings and Income
If she counted her employer’s contributions to her 401k on both the savings and the income side her savings rate would be $24,500 / $80,000 = 30.63%. This is the most accurate calculation of the three.
The last potential savings to consider are any portion of loan payments that are going to the principal of the loan. This is often debated among the FI community.
The argument for including this in your savings is that it is directly increasing your net worth by lowering your outstanding debt. The argument against this is that you will likely not see a 5% inflation adjusted return on this money, required by the assumptions in the savings rate chart. Though, if you had a loan at 7% and inflation remained at 2% or lower you would see a 5% inflation adjusted return.This could also include principal only payments that you may make towards a loan, not just the principal portion of a regular payment. Again, there is no right or wrong answer here it is just personal preference as to what you would like to include.
Full Calculation of Mary’s Savings
Let’s calculate Mary’s savings in entirety.
She is able to save $500 per month in her savings account.
She contributes $19,500 ($1,925 per month) into her 401(k) and receives $5,000 (~$417) employer match.
She contributes $100 per month into a Roth IRA.
She also pays $100 per month onto her mortgage principal. She has decided to exclude the principal portion of her mortgage payment and she has no other outstanding debts.
$500 savings account + $1,925 401(k) contribution + $417 employer 401(k) contribution + $100 Roth contribution +$100 extra principal payment = $3,042 Total Monthly Savings.
Calculating Income
Calculating our income does two main things for us. First, it allows us to figure out our total spending. Second, it gives us the last piece we need to finish calculating our savings rate.
Our spending, in the simplest terms, is the difference between our income and our savings, right?
Income – Savings = Spending
We don’t need to know how much we are spending to calculate our savings rate. But, how much we spend is important because with this we can calculate how much we will need in investments to retire. The generally accepted formula is 25 times annual spending equals the amount needed to retire (assuming a 4% withdrawal rate, refer to the Trinity Study for specifics).
For example, annual expenses of $40,000 x 25 = $1,000,000 needed in investments to retire.
Now, when we talk about income we generally think pre-tax (gross) or post-tax (net). Depending which of these you choose will have a large impact on your perceived savings rate.
This again will be personal preference, but I generally advocate for using net income. Your savings rate will be higher using this method because you take taxes out of the equation. Taxes are a sort of forced spending and you can’t control this, or save what you are paying in taxes. To me, this makes more sense because it allows you to achieve a savings rate of 100%. If you were to use gross income the highest possible savings rate you could achieve would be 100% minus taxes.
Remember, you may have to make some adjustments for your 401(k), if applicable. You will need to add your contributions back to your income as well as your employer match, if you are going to include that on the savings side.
After you decide between gross and net income you will need to take into consideration all other forms of you income you might have. This could be interest, dividends, side-hustles, etc.
We’ll refer back to Mary for another example.
We know that she nets $75,000 per year from her job ($6,250 per month),
Contributes $19,500 ($1,625 per month) to her 401(k) and receives a $5,000 ($417 per month) employer match.
She also earns $10 per month in interest
$100 per month from dividends.
$200 per month from side-hustles.
$6,250 monthly job income + $1,625 401(k) contribution + $417 employer 401(k) contribution + $10 interest + $100 dividends + $200 side hustles = $8,602 total monthly income.
Putting It All Together
We now have all the pieces needed to calculate Amy’s savings rate.
Mary’s Monthly Savings = $3,042
Mary’s Monthly Income = $8,602
Amy’s Savings Rate = $3,042 / $8,602 = 35.36%. A savings rate of 35% puts Amy at 25 years until retirement, assuming she has a zero dollar net worth.
I recommend calculating savings rate on a monthly basis. And at most, quarterly. Calculating your savings rate is one of those eye-opening things that can directly affect your actions going forward. If you are only calculating this annually and you then realize that you are way behind where you want to be, it is too late to make any changes for the year. If you calculate your savings rate monthly, you don’t risk wasting too much time not knowing where you stand. I find checking on this more frequently motivates me to not only maintain my current rate but also to try to find ways that I can improve as well.
What is your average savings rate?
Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.
I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
For a variety of different reasons, we all want to increase our net worth. Increasing our net worth and accumulating wealth can be used synonymously for the purpose of this post. Achieving financial independence requires the accumulation of wealth. In order to be successful in the game of wealth accumulation we need a couple different teams. The first team will run our offense. The second team will run our defense. Our job as the coach is to manage both of these teams. One without the other is ineffective at best.
Offensive Team
Offensive teams in the sports world focus on scoring goals, points or touchdowns. In the game of wealth accumulation offense is a little bit different.
The offense in the game of wealth accumulation is responsible for receiving income. The offensive team is made up of earned income, passive income and capital gains. The team may include, full-time or part-time job players, rental property players, interest players, investment account players and more.
Defensive Team
Defensive teams in the sports world do just the opposite of the offensive team, prevent goals, points or touchdowns from being scored against them.
In the game of wealth accumulation, the defensive team has a very important job. Their job is to safeguard the income that the offensive team earns. The defensive team may include budget players, saving players, investing players and more.
Scenario One: Strong Offense – Weak Defense
In this scenario you have a strong offense but a weak defense. Your offensive team is bringing in a large amount of income for you. Great, right? Sure, except your defense isn’t keeping your money for you. They’re allowing you to spend wastefully on things you don’t need or find value in. Your wealth accumulation is net zero because you are spending all the money that you are earning. This scenario is often seen with lifestyle inflation: earn more, spend more.
Scenario Two: Strong Defense – Weak Offense
In this scenario your offense isn’t the greatest but they’re doing enough to keep you afloat. The lack of offense creates a need for a strong defense. Budgeting and limiting wasteful spending are the key players on this defensive team. Your wealth accumulation in this scenario is also net zero. What this scenario provides is the opportunity to start accumulating wealth slowly as the offensive team becomes more efficient.
Scenario Three: Strong Offense – Strong Defense
This is the ideal scenario. Your offensive players, full-time job, rental income and capital gains are bringing in a large amount of income. Meanwhile, your defensive players, budget, saving and investing are safeguarding a large percentage of that income. Your wealth accumulation is net positive in this scenario.
Coaching
The coach of a wealth accumulation team is no easy task. It takes a lot of planning and maintenance. Making each player work together within your team will be crucial to your team’s success.
Building a strong offensive team can be a large hurdle for those who are later in life. Drafting a new full-time job player is difficult. It often makes more sense to recruit passive income and capital gains players to your team.
A strong defensive team is a must for success. This is possible for coaches at all levels and ages. Recruiting budget players, savings players and investing players can be done almost instantaneously. These players often require more planning and maintenance than offensive players do. A strong defensive team has the ability to create more opportunity even when working alongside a weak offensive team. Defense wins championships right?
Putting The Game Aside
Let’s put the game aside for a moment. Accumulating wealth can be very simple. We need to earn income and then save some of that income. The more that we save the more wealth we will accumulate. Earning a large income on its own is not enough.
Earning a large income is nice and may provide you with many of the creature comforts in life. A big house, luxury imported car, frequent vacations and trips to fancy restaurants, etc. All of these things do little for wealth accumulation. True wealth accumulation comes from saving and investing.
Earning $200,000 per year and spending all of your income will not help you accumulate wealth. Earning $50,000 per year and investing 20% of your income will rapidly increase your ability to accumulate wealth. Learning to manage the money you make will have a greater impact on your wealth than how much you earn.
This is part three of a series of interviews affectionately deemed “The Average Millionaire Interview Series” exclusively here on Live Off Dividends. Despite contrary belief, millionaires are real people who face adversity just like you and I. This interview series allows us the unique ability to gain some incredible perspective from these amazing, successful individuals.
My hope for this series is that it will provide an inside look into the lives of a variety of fairly normal, or “average” if you will, individuals that just happen to be millionaires. We all come from different backgrounds and have unique experiences and opinions and that’s exactly what makes these interviews so important. The insight provided in these interviews is invaluable and I hope you will enjoy them as much as I have.
This interview was done with Jason Edwards. Let’s jump right into it.
1.) Tell us a little bit about yourself. How old are you? Where did you grow up? Where do you live now?
I am 47 years old. I grew up in a small-town in Minnesota. I now live in Rhode Island have been on the East Coast for 20 years. I hope to someday return to the upper Midwest, but generally like where I live.
2.) How much education did you receive?
I have a Ph.D. in Communication Studies with an emphasis on rhetoric and politics. I am one of the few people in the FI community that loves politics. It is what I do my research on and teach for a living.
3.) What is your current occupation? How long have you been doing that? What were some of your previous occupations?
I am a college professor and the chairperson of our department at a mid-size university in New England. I have been teaching at my current university for 15 years and teaching college courses for 25 years. I have worked the typical teenage jobs like fast food, grocery store. I was also a college speech and debate coach and have worked as a front-desk coordinator, detox technician, and a community correctional facility. For a time I also worked as an Education and Political Affairs Coordinator for a local agency.
4.) Is your current occupation your dream job? If so, what do you like most about it? What would you change about it if you could? If not, what is your dream job and what has prevented you from pursuing it?
I love what I do. I never thought I would be teacher when I was in college, but I kind of fell into it. I thought I would coach speech and debate or go into the foreign service for the state department. I think what I dislike the most is the customer service mentality of students and the administration. The ivory tower isn’t all its cracked up to be. However, I still love teaching and research. I hope to do it for the rest of my career. Maybe not full-time after a few years, but I hope to always teach and be on a college campus.
5.) At what point did you realize you were a millionaire? How old were you and how did it feel?
I am not quite a millionaire, but I did have a million dollar turn around in eight years. I went from 150k or so in negative net worth to over 950k at the time of this writing. That fluctuates daily based upon the market. I hope to hit 2 comma club by the end of 2021, but that depends on the stock market.
6.) What were the most important steps that you took to get where you are today?
I think there are a couple of things. First, I dedicated myself to saving at least 30k in investments for the past 8 years. Mind you I did have about six figures in investments, but a lot more student loan debt. 2) I taught extra courses and every extra duty I could at my university for extra money for the past 10 years. I hope to back that down a bit now that my wife is earning more money. 3) I earned Public Service Loan Forgiveness, which knocked our debt down about 50k, but I also paid off over 150k in debt on my own. Still have a ways to go before we are debt free.
7.) In general, how do you feel about debt? Are you willing to utilize debt to get further ahead or would you rather be entirely debt free?
Generally speaking, I am not a fan of debt. I don’t know if the borrow is slave to the lender as Dave Ramsey says, but it is a pain. If I was a braver man I might try the leverage game with real estate, but generally speaking I am not a fan and prefer to be free. However, I don’t condemn folks that do it. Staying out of credit card debt and car loans and the like is probably the most important.
8.) Do you track your net worth? If so, what does your process look like?
Yes, I use Personal Capital. I am not a spreadsheet person, but I do check Personal Capital way too much.
9.) If you could change any one thing in the world, what would it be and why?
Wow that is a tough question. I would probably change how the world grows in concert with each other. I think that there is so much uneven growth and dealing with global problems that it creates inequities everywhere. I would like to be different then I think you can tamp down some of the global animosity that exists.
10.) What are some of your short term goals, say less than 5 years out? What about long term?
Short-term goals. My top goal for my job is to write another single-authored book. I have written one and edited 3 other ones with co-authors, but I would like to write another book. I hope to reach FI in five years. I hope to be at my job for another five years to obtain health care should I want to retire. I want to lead more global study tours for my students.
Long-term goals would be to reach FI by the time I am 53. I would like the option to retire by the time I am 55. I want to leave a financial legacy for my son. I would like to get to the point that I would be able to teach at another university and possibly other ones abroad. I have a pretty good reputation in my field, but that might come after I am 60. I would like to live abroad for a year or two with my wife and son. Giving him an international experience is important to me.
11.) If you had to give just ONE piece of financial advice to your younger self, what would it be?
Start investing earlier. I didn’t start until I was 33. Even just 2k a year would’ve made a ton of difference. I plan on making my kid investing when he gets his first job/income.
12.) How would you describe your perfect day?
I think a great day would be going to the gym in the morning. Coming home having breakfast with my family. Some activity with them for the day (e.g. museum, going to see some historical site, bowling, whatever). Then at night meeting friends for dinner and drinks and just sitting in a good bar/pub talking about life and issues and whatever. I really like people and need that kind of comraderie.
13.) Do you have any side hustles? If so, which are your favorites?
I sell tradelines and give plasma. That makes me about 8-10k per year. I also teach extra classes but would like to back that down a bit. Too much work.
14.) What was your biggest financial mistake? What lesson(s) did you learn from it?
I took out some student loans when I didn’t need them. The vast majority were for school/living expenses, but I took a loan or two that I didn’t need too. That was probably about 10k total.
15.) What is your favorite place to vacation and why?
I love Mexico. I used to live there for a short time a long-time ago and got a degree in Spanish as an undergrad. I love Iceland because it is the first place my wife and I took a trip together. However, I am not really a fan of going to the same place twice. I want to try new places. Maybe that will change, but there are so many countries I want to see.
16.) If you had $20,000 given to you, how would you spend it and why?
If you asked me that question last year I probably would’ve put it into my kids 529 plan. However, if I have to spend it I would definitely take a NICE vacation. It has been a while since we took a vacation. We have traveled, but it was always tied to work. I would like to go somewhere where I don’t have to work. That hasn’t happened in like 7 years. I think it is time to remedy that.
17.) What is your favorite personal finance related book?
18.) If you aren’t retired, when do you expect to retire? What are your retirement plans?
I don’t know if I will ever truly quit working altogether. My dream is to be able to retire by 53-54. I could then retire from my current job and make sure we have health care until Medicare. Then I would like to teach for another university closer to my family for a few years. I would hope that one of those gigs might be abroad. And then when my son goes off to college I would love to teach at universities across the world for a couple of years just to see what it look like. Getting to travel and be paid to do it would be AWESOME!
19.) Favorite non-personal finance related book?
I think every politically minded person should read my books of course (ha, ha). No seriously I love a book called The Lover’s Quarrel by Elvin Lim. It explains historically the political development of the U.S. and gives the roots of why we have as much discord as we do in the U.S.
20.) Do you have a product, service, website, etc that you would like to tell us a little bit about?
I don’t have a product or anything. I do some financial coaching on the side to help people. I absolutely LOVE coaching. It is so much fun to see other people do well and to know you might have had a small hand in that. That is probably why I like teaching so much.
21.) If you could step into my shoes, what would you have asked yourself that I didn’t? How would you have answered?
Another tough question. I guess I would ask what is the reason you want to obtain a certain level of financial success. Why pursue FI or FIRE?
My answer is that I want the option to leave the workforce if I need too and also leave a legacy for my son. This sounds corny but I love oil paintings, particularly portraits. I have a dream of 7 generations from now an oil painting of my wife and I hangs in someone’s home (hopefully our descendants) and they live a good life and give back to people and help the world and they look at that painting and say they started this. I would hope that by the time that 7 generations that the people who would be there would be deeply involved helping the world. They would give a lot more than they took.
Concluding Thoughts From Our Interview With Jason Edwards
Jason and I are on the same page with Personal Capital and recommending The Simple Path to Wealth. Jason gave us some great advice. Particularly, to start investing as soon as possible and don’t take out more loans than you need. He also showed us how diligent saving/investing coupled with hard work can make you successful. Although Jason is just shy of a million dollar net worth, his $1M+ turnaround in just eight years is nothing short of spectacular. I hope to update this post in the next few months to affirm Jasons millionaire status.
I hope you enjoyed our interview with Jason as much as I did and that you learned a thing or two. Here’s to the Edwards descendants, seven generations from now, admiring the oil painting of Jason and his wife hanging above their fireplace mantel.
If you’d like to check out the previous installments of this series you can find them below:
Would you, or do you know someone who might like to take part in our next Average Millionaire Interview? Feel free to reach out via our Contact page!
Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.
I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
This is part two of a series of interviews affectionately deemed “The Average Millionaire Interview Series” exclusively here on Live Off Dividends. Despite contrary belief, millionaires are real people who face adversity just like you and I. This interview series allows us the unique ability to gain some incredible perspective from these amazing, successful individuals.
My hope for this series is that it will provide an inside look into the lives of a variety of fairly normal, or “average” if you will, individuals that just happen to be millionaires. We all come from different backgrounds and have unique experiences and opinions and that’s exactly what makes these interviews so important. The insight provided in these interviews is invaluable and I hope you will enjoy them as much as I have.
This interview was done with Craig Smith. Here’s a little bit about Craig before we get into it.
Craig is 61 years old and in good health and active in many things. He views life’s priorities as health; spiritual; family and finally financial independence! His current net worth is about $8.4M, adding another $1M if you include real estate. He came from a small family and had great parents who are now deceased. He lives south of Pittsburgh now. Craig is Protestant by faith, both sides of his family go back about 7-8 generations to mid 1700s here in America before arriving from Gloucester, England and Ireland, respectively.
Let’s jump into the interview:
Tell us a little bit about yourself. How old are you? Where did you grow up? Where do you live now?
I started my life in north WV and now reside in Pittsburgh, PA. Played sports in high school and trumpet in the band. Though never in sales formally (we are all in sales the minute we rise out of bed), I recall selling strawberries at the age of 5 in my little wagon for a quarter in the mid 1960s, selling fishing worms through the local classified paper and shoveling snow as a teenager. Worked with my dad after school hours and summers assisting in property surveying. Always interested in making a few dollars.
Then onto University to earn a BS in civil engineering. Played a little rugby and worked summers with the highway department. Summer employment is very impressionable on one’s career at that age. I still have useful memories of the skills I learned. The pint here is the reader should have their children being very active in their pre-20 years – not being idle.
How much education did you receive?
BS Civil engineering. Some graduate level courses.
What is your current occupation? How long have you been doing that? What were some of your previous occupations?
Retired. Retired at 56 with 30 years time / age 55 eligible. Spent 30 years with same employer as engineer and on a lock and dam. Always a second income. Investing in the stock market. Currently a landlord. My properties include a duplex in Pittsburgh (1990)…sold a multi unit in 2018 in Pittsburgh (owned since 1990)..bought current house in 2018 (see pic)…5 SFH in WV (acquired 2002- 2011) Always a 2nd income.
Is your current occupation your dream job? If so, what do you like most about it? What would you change about it if you could?
Yes retired, but work full time on my properties. I am one who believes time spent improving property is a good way to spend time and make a living at it. I like most the ability to answer to myself and no one else. Not to have to explain myself, even to my fiancé. I would change the driving. Some drives are almost 2.5 hours.
At what point did you realize you were a millionaire? How old were you and how did it feel?
Age 47 in 2007, then saw it dip to $750k in 2009 and back over in 2010. The 1st million took me 22 years.
Craig’s Net Worth Chart
What were the most important steps that you took to get where you are today?
Persistence. Never, never give up, ask questions and develop a can do attitude.
In general, how do you feel about debt? Are you willing to utilize debt to get further ahead or would you rather be entirely debt free?
Mortgage debt is fine, pay it down as fast as you can. I use it for write-off in schedule. Auto debt at 0% is fine, we have a new Subaru with 0% interest. Leverage is a good thing as long as you’re not overextended and you have a Plan B if Plan A falls apart.
Do you track your net worth? If so, what does your process look like?
Yes I jot it down daily and monthly – especially in a good market. In a bad market (like last week) I don’t look.
If you could change any one thing in the world, what would it be and why?
CHINA. I’d knock their CCP down a peg or two. We are not winning this war, a war with no bullets. They have a 50 year plan seeking world domination and we are not fighting back nearly enough. Buy American.
What are some of your short term goals, say less than 5 years out? What about long term?
Short term goals: Weigh 200 pounds, all properties rented, more jogging, travel Europe with fiancé, see Italy again, more South America travel, more United States travel and possibly buy a condo in Naples, FL.
PRIORITIES: Spiritual growth. (Serving) then good health, then those i love, then business (career/money).
I have a VALUES and NON-VALUES list also: VALUES: Balance (in life) / De-clutter (stuff) / Experiences (more) / Moments (live more) / Time (free time; manage time; avoid time wasters). NON-VALUES: CAREER (real estate) / Community / Family / Fitness / Finance, etc.
If you had to give just ONE piece of financial advice to your younger self, what would it be?
PAY YOURSELF FIRST.
How would you describe your perfect day?
Fully productive, things jotted down are ticked off, daily goals achieved or some progress, making others laugh and feel good, wasting no time and optimizing experiences in that day. Or relax on the beach.
Do you have any side hustles? If so, which are your favorites?
Just my real estate, some opportunities come spontaneously. I used to always be engaged in ‘side hustles’ (it used to be called ‘moonlighting’) , but not as much now. I’m hoping for gas royalties. I might help volunteer at the church or in explaining taxes. Facebook has great sites to learn from, possibly mentor young people.
A critical area upon building wealth and going into retirement is: TAXES. I spend an inordinate amount of time studying US tax regulation, law, CPA guidelines and doing my own taxes. No one knows how to guard your wealth better than you do. I encourage the viewer to do their own to learn everything about their spending and income. You might say this is my side hustle from December thru April 15th.
I did hire a contractor in January to install new kitchen cabinets, sink, electrical and duct work for a dear elderly friend. She was my late mother’s best friend and could never have afforded it. (When I was younger, I would do this job – but I will not do too much work for family and friends – seldom ends well. A takeaway from this is “never do business with family, friends, or unsuccessful men”).
Kitchen cabinets Craig had installed for his late Mother’s best friend.
What was your biggest financial mistake? What lesson(s) did you learn from it?
Investing in commodities (cotton, cattle, etc., beware the brokers in Wanamaker Street in Chicago). Lesson: don’t part with money unless you understand what your investing in.
What is your favorite place to vacation and why?
I am practicing to become a snowbird in Florida. I like southwest Florida from Fort Myers to Naples on the gulf side.
If you had $20,000 given to you, how would you spend it and why?
Invest it, not spend it, in index stock funds and think about the return. For example: $20k at 10% returns, $2k/year or about $650/month pretax. I’d spend that.
What is your favorite personal finance related book?
Importantly, I record podcasts and Youtube lectures to listen to with earplugs while driving, walking the dogs, working, etc. Always looking to get more information. “Information is the great equalizer.”
If you aren’t retired, when do you expect to retire? What are your retirement plans? / If you are retired, at what age did you retire? Do you have any regrets about retiring at that age?
Checked that off my bucket list at age 56! Present plans are just staying fully invested, improving and maintaining several properties, spend time with fiancé and dogs and cat and keep in touch with friends. My regrets for retiring at that age? NONE. My dad once said “If I’d known it was this good. ..I’d did it 20 years ago!”
Favorite non-personal finance related book?
Hmmmm. I’m all non fiction. Outside of personal finance – my library is mostly self-help, real estate, history, biographies. I credit Brian Tracy, famous speaker, with helping me develop a can-do mindset, ‘think and grow rich’ on developing a prosperity consciousness. Currently enjoy ‘The Vikings’ on Hulu, so good. I also like Chicago PD and Law and Order SVU.
Do you have a product, service, website, etc that you would like to tell us a little bit about?
Thank you, buy my book when it’s finished. Draft title is ‘To Prosper’, quotes and observations written down over my lifetime.
If you could step into my shoes, what would you have asked yourself that I didn’t? How would you have answered?
One answer is to always ask yourself at any age “What is the best use of my time?” Another: stay single, marry if you must and no kids – until later.
Concluding Thoughts From Our Interview With Craig Smith
Craig provided us with a plethora of great advice. My favorite pieces of advice were to understand what you’re investing in, pay yourself first, be persistent and never stop learning. I hope you enjoyed our interview with Craig and that you learned a thing or two.
Would you, or do you know someone who might like to take part in our next Average Millionaire Interview? Feel free to reach out via our Contact page!
Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.
I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
The first quarter of 2021 was great for my rental properties. Honestly, I have very little to complain about this quarter, things went great overall. Also, I finally closed on my 5th property and can not be happier to have that deal behind me.
I have a friend whose father is thinking about selling his house sometime soon. He reached out to me and asked if I would be interested and I told him absolutely! I’m not sure if this deal will happen or not but if it did I would be moving out of my owner occupied two-family and into that house. I’m pretty excited for the possibility.
Property 1 – Owner Occupied Two Family
I’ve owned and owner occupied this two-family since 2017. All things considered, this property has been great to me. I purchased the property for $75,000 and put 20% down. In late 2019, I was able to get a HELOC on this property for just over $40,000. Here’s the spreadsheet for the first quarter of 2021 below:
It was a good quarter for this property aside from a couple little hiccups. I expected the gas/electric bill to be a bit lower starting out this year for a number of different reasons. It was a pretty mild winter, less Covid restrictions and there is one less person living in the house (my tenants girlfriend moved out when they split up). For whatever reason, that didn’t happen, but no big deal.
We had a couple very windy days in March, which led to an unfortunate event. One of my trash cans got blown into my exterior screen door and absolutely destroyed it. On the same day, my german shepherd Harvey attempted to jump through a window to get at a squirrel or something outside (absolute lunatic, he just turned two in April). He shattered the window but thankfully he didn’t get hurt or manage to make it outside. This is actually the second time he’s done this. The window was an old school single plane, wooden window with the big metal weights in it. It needed to be changed eventually anyway, Harvey just thought it should be changed a little sooner than I did. Between the screen door and the window it ended up costing me $330.48 and a few hours of time.
It has cost me an average of $391.56 per month to owner occupy this house so far during 2021. Although, I paid $126.26 towards the principal on the mortgage in January and February. I could have owner occupied this house for $307.14 per month without those extra payments. In March and going forward, I will be putting that $126.26 towards my HELOC that I drew on to purchase my 5th property. It has a higher interest rate and it is variable. Considering the alternative of owning a single family house or renting, ~$300/month for housing is pretty cheap. If/when I were to move out, I would rent my apartment for around $850, leaving around $500 cash flow per month based on these first quarter numbers.
I still plan on doing some more work to this house this year. More windows, exterior paint, interior paint possibly, some flooring. We’ll see.
Property 2 – “Cool” Two-Family
I just closed on this property in February 2021. The purchase price was $115k and I put 25% down. I will be referring to this two-family as the Cool property. Here’s the spreadsheet for the first quarter of 2021 below:
Being that I closed late in the quarter, there isn’t a whole lot to look at here. One of the units was vacant when I closed so I had to get that filled first thing. The unit was basically ready to go aside from a few small things and some cleaning. Changed the locks, fixed some cabinet doors, a little bit of painting, fixed an exterior railing, replaced a few lightbulbs, etc. It cost me just $89.75 to do everything I needed to do. It’s worth noting that I have paint, lightbulbs and plenty of other stuff on hand, otherwise this would have cost a bit more money.
As you can see, it cost me $80.61 to own this property in March. When I got the vacant unit filled it was almost half way through March, resulting in prorated rent. I expect to see pretty solid cash flow from this property going forward.
Property 3 – “East” Two-Family
We refer to this two-family as the East property. This is the first of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s the spreadsheet for the first quarter of 2021 below:
This property got off to a great start this year. Much improved over the lackluster year last year. We did have a tenant move out March 1st and it was the easiest, most seamless transition I’ve yet to experience. The old tenants were great about communicating their plans and allowing us to show the apartment before they left. We had 0 vacant days and had minimal work to do on the apartment in between. If only it went that smoothly every time.
The property has cash flowed $630.09 per month so far during 2021. I don’t want to jinx it, but this may finally be the first great year for this property.
2021 Projected Capitalization Rate – 9.45%
Total Cash-on-Cash Return – 210.99%
Internal Rate of Return – 48.64%
Property 4 – “North” Three-Family
We refer to this two-family as the North property. This is the second of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $80,000 and put 0% down. Here’s the spreadsheet for the first quarter of 2021 below:
So far so good here. No issues, no changes.
The property has cash flowed $520.77 per month so far during 2021. This property has done great year after year and I see no reason why it won’t continue to do so.
2020 Capitalization Rate – 7.81%
Total Cash-on-cash Return – 528.51%
Internal Rate of Return – 144.56%
Property 5 – “South” Two-Family
We refer to this two-family as the South property. This is the third of three properties from a multi-property deal back in 2018. My father and I partnered 50/50 on this three property deal. We purchased this property for $50,000 and put 0% down. Here’s the spreadsheet for the first quarter of 2021 below:
Again, no changes here. Smooth sailing so far this year. This property will need updates eventually, time will tell when that comes to fruition.
This property has cash flowed $548.97 per month so far during 2021. This property always does well, but it is my least favorite and I kick around the idea of selling it frequently.
Disclosure: We may receive a referral fee if you sign up with a service through a link on this page.
Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
Generally, parents will make every attempt to give their children a better life than they had. This can be seen in all aspects of life whether it be home life, education, general wellness and our focus today, financial. Children on the other hand, typically don’t care too much for finances until they reach adolescence. At which point, many children become more independent. They start to understand that things cost money and that they don’t have any.
Luckily for them, being the great parent that you are, you’ve decided early on to start saving for them. You are now able to buy them a car and let them begin working and learn all of the invaluable lessons that come along with part time jobs. Maybe you’ve even saved enough to pay for them to go to college. And maybe you’ll have enough to help them purchase their first home.
Doing these things for your child opens the door for positive financial conversations. These positive financial conversations can spark an interest in your children that may benefit them for the rest of their lives.
What are my options?
There are a lot of ways you can start saving and investing for your children. Saving and investing is not a one size fits all operation, the goal of this post is to give you as many options as possible. As with most things investing, a long time horizon is ideal. Proper planning while your children are young will give them the best chance for positive investment returns. The chart below shows the growth of $1,000 – $15,000 earning a 7% return over the span of 5 – 25 years.
UTGA and UTMA Accounts
UTGA and UTMA accounts are custodial accounts named after the laws they’re based on. Uniform gifts to minors act and uniform transfers to minors act, respectively. Being custodial accounts, they are held in the name of a minor but controlled by a custodian (usually a parent or other relative) until the minor reaches an age of majority. The age of majority is designated by your state, typically between the age of 18 and 25 (sometimes referred to as the age of trust termination). Contributions made to these accounts are with after-tax dollars and are not tax deductible.
UTGA vs UTMA
The primary difference between these two types of accounts is the allowable assets for each. An UGMA account is the original custodial account and is limited to financial products such as stocks, mutual funds, bonds, cash, insurance policies, etc. An UTMA account can hold physical assets such as real estate, patents, cars, art and all of the same products that can be held in an UGMA account.
**Some states have not adopted the newer UTMA account and may not be available to you.**
Advantages:
The money contributed into the account is exempt from paying a gift tax, up to the 2021 maximum of $15,000.
The taxes owed on the first $1,050 of realized gains will be tax free. The next $1,050 will be taxed at the minor’s tax rate. The amount above $2,100 will be taxed based on kiddie unearned income tax rates.
The custodian may withdraw money at any time for the benefit of the minor. These benefits must be for costs other than food, shelter and clothing and may include expenses such as education, sporting activities and summer camps.
Easy and free to create an account when compared to a potentially more complicated and costly trust.
When the minor takes possession, the funds can be used for anything, not just education expenses (also a potential disadvantage).
Assets in these accounts may be protected from creditors and bankruptcy provided that the account has been used correctly.
Disadvantages:
These accounts are reported as a child’s asset when it comes time to apply for financial aid. The child’s aid eligibility will be reduced by 20% of the assets value.
Taxes will be owed on any realized income including dividends, interest, etc. (Up to 37% based on kiddie unearned income tax rates).
When the minor takes possession, the funds can be used for anything, not just education expenses (also a potential advantage).
The account will be part of the custodians taxable estate until the minor takes possession.
You cannot transfer the account to another minor or beneficiary.
Gifts in excess of $15,000 per year require a form to be completed for the IRS and must also be counted toward the individual’s lifetime gift-tax exclusion limits.
Child owned Roth IRA
A child owned Roth IRA is similar to a custodial account in that the decisions such as contributions, investments and distributions are made by a custodian until the child reaches the age of majority. At that point, the assets must be transferred to a new account in the child’s name. While this type of account has no age restriction, it does have income restrictions. Contributions are made to this account with after tax dollars and all growth within the account is tax free.
**A traditional IRA may also be opened for a child. A traditional IRA operates similarly to a Roth except money contributed to a traditional IRA is tax deductible. In this case, being a custodial account, the deduction will apply for the child, not the custodian. Because of this tax deduction, money withdrawn from a traditional IRA at retirement age will be subject to taxes. Contributions made to a traditional IRA are not able to be withdrawn tax and penalty free as they are with a Roth IRA. Withdrawals can be made for specified purposes such as first time home purchases, higher education costs and medical emergencies.**
Advantages:
Tax free growth within the account.
Contributions can be withdrawn at any time for any purpose.
Capital gains can be used to cover higher education costs, buying a first house or certain emergencies.
No minimum age requirement.
Retirement account balances are not included as assets on the FAFSA. Withdrawals from a retirement account need to be reported on the FAFSA as income from the prior year. If a distribution from a Roth IRA is made during a students sophomore year (high school or college), it will not be reported on the FAFSA since the income is reported from the prior year.
When the minor takes possession, the funds can be used for anything, not just education expenses (also a potential disadvantage).
Disadvantages:
Children must have earned income for the year. Contributions are limited to $6,000 (2021 limit) per year or the amount of earned income, whichever is less. This income can come from babysitting, lawn mowing, modeling, etc.
Capital gains withdrawn before age 59 ½ will be subject to a 10% early withdrawal penalty (exceptions apply).
When the minor takes possession, the funds can be used for anything, not just education expenses (also a potential advantage).
Roth / Traditional IRA
Rather than open a custodial IRA for your child, you can open one for yourself. All the same rules apply as a custodial account, except that the account will not transfer to a beneficiary at the age of majority.
Advantages:
Full control of how the money is used.
A way to save for yourself and children simultaneously.
Retirement account balances are not included as assets on the FAFSA. Withdrawals from a retirement account need to be reported on the FAFSA. If a distribution from a Roth IRA is made during a students sophomore year (high school or college assuming the student graduates in 4 years), it will not be reported on the FAFSA since the income is reported from the prior year.
If using a traditional IRA, contributions are tax deductible.
Disadvantages:
The money will not transfer to a beneficiary at the age of majority.
Required minimum distributions at age 72.
$6,000 annual contribution limit (2021).
529 College Savings Plan
529 plans were named after section 529 of the Internal Revenue Code. These are state sponsored plans but you are not limited to invest just in your state’s plan. Generally speaking, you could live in New York, invest in a Texas 529 plan and send your child to school in North Carolina. There is somewhere around 6,000 colleges and 400 foreign colleges that accept 529 plans. Contributions made to a 529 plan are made with after tax dollars. Some states do offer income tax deductions or tax credits, you may need to invest in your home state’s 529 to claim the benefit though. Funds grow tax free inside the account and are also tax free when withdrawn for qualified education costs.
Advantages:
Tax free growth and withdrawals for education expenses. Qualified withdrawals may include tuition and fees, books and materials, room and board (for students enrolled at least half-time), computers and related equipment, internet access and special needs equipment.
Up to $10,000 per year, per beneficiary may be used to pay for K-12 tuition expenses, tax free.
Up to $10,000 (lifetime limit) for the beneficiary (and siblings) for student loan repayments, tax free.
The beneficiary can be changed to another child or another qualified family member.
Parental assets reduce financial aid by up to 5.64% vs. up to 20% of student owned assets.
The owner of the account retains control and is not transferred to the beneficiary.
Similar to a Roth IRA, contributions may be withdrawn tax and penalty free.
Disadvantages:
Non-qualified withdrawals are subject to tax and a 10% penalty.
Some plans have required minimum initial contributions.
A roll-over from one state’s plan to another may subject any income tax deductions or credits to recapture.
Limited investment options within the account, sometimes accompanied with high fees.
529 Prepaid Plan
These accounts are similar to 529 savings plans with some key distinctions. The major difference is that they are, like the name suggests, prepaid. The owner of the account will purchase tuition in the form of years, credits or units in a lump sum or installment payments.
Advantages:
The ability to lock in tuition costs at current rates.
Most states guarantee the funds in these accounts will keep pace with inflation.
Disadvantages:
A prepaid plan will typically only cover tuition and fees.
Some states have specific enrollment periods throughout the year.
Coverdell Education Savings Account (ESA)
These accounts are similar to 529 savings plans in that contributions are made with after tax dollars, money grows tax free within the account and withdrawals made for qualified education expenses are tax free. The major difference between these accounts are the contribution and income limits as well as the investment flexibility that an ESA provides.
Advantages:
Virtually limitless investment options.
Tax free growth and withdrawals for education expenses. Qualified withdrawals may include tuition and fees, books and materials, room and board (for students enrolled at least half-time), computers and related equipment, internet access and special needs equipment.
The funds may be rolled over into another ESA for another eligible family member.
Parental assets reduce financial aid by up to 5.64% vs. up to 20% of student owned assets.
Funds may be used for K-12 education expenses.
Disadvantages:
Contributions cannot be made after the beneficiary reaches age 18 without paying a 6% excise tax.
Annual contribution limit of $2,000 (2021).
The account must be fully withdrawn by the time the beneficiary reaches age 30 or the account may be subject to tax and penalties.
You can’t contribute to an ESA if you make more than $110,000 (single) or $220,000 (married filing jointly) (2021). Phase out limits start at $95,000 and $190,000, respectively.
Non-qualified withdrawals will be subject to tax and penalty.
Trust Funds
A trust fund is an estate planning tool that holds and manages assets on behalf of a person or organization, managed by a neutral third party. The grantor establishes the trust fund and the beneficiary is who will receive the assets. A trustee will oversee and fulfill any responsibilities outlined by the grantor as well as handle distributions to the beneficiary. A trust lets you pass assets to someone in a structured way. This allows you to set specific rules for when the beneficiary can access the assets and how they are able to utilize them.
Advantages:
Can hold basically anything within a trust: cash, stocks, bonds, houses, businesses, artwork, etc.
Ability to pass assets to specific people in specific ways.
Beneficiaries do not have to pay taxes on distributions received from a trust.
A trust can allow your family to avoid probate court. This also keeps your personal wishes private.
Disadvantages:
Trusts can get complicated and expensive to put into place.
Trusts reduce need-based financial aid eligibility by 20 percent of the assets value. These accounts are reported as a child’s asset when it comes time to apply for financial aid, even if access to the assets is restricted (there can be some exceptions to this rule such as court ordered restrictions).
The assets in a trust are no longer yours. The trustee(s) will control the assets within the trust.
Home Equity Loan
Home equity is the difference between the appraised value of your home and how much you owe on the home. A home equity loan is a way to get a fixed rate loan based on this equity. Home equity loans are received as a lump sum in the amount of the loan and you can use the money for whatever you choose.
** Similar to home equity loans, home equity lines of credit (HELOC) can be used in a similar manner. HELOCs differ in that they function as a revolving line of credit. They also have variable interest rates. You will typically have 10 years to draw from the loan (draw period) and then 20 years to pay it back (repayment period).**
Advantages
Fixed rates provide predictable payments typically with lower interest rates than other loan types.
Repayment terms can be from 5 to 30 years.
Home equity is not a factor in determining financial aid.
Disadvantages
If you sell your home before the home equity loan is paid back, the remaining balance will be due.
Home equity loans usually come with closing costs and fees that typically amount to 2-5% of the loan amount.
A home equity loan uses your home as collateral, late or missed payments could put your home in jeopardy.
Employer Sponsored Retirement Plan (401k/403b/457b)
These types of investment plans are offered by employers to provide employees an option to save for retirement. With these plans, the employees shoulder all the risk. Some employers will offer to match employer contributions up to a specific percentage of their salaries. These accounts are funded with pre-tax dollars and are subject to tax when distributions are made.
It is important to note that there are differences between 401k’s, 403b’s and 457b’s so be sure to know the rules of your specific plan before making a savings plan.
**Some employers will offer a Roth version of these retirement account as well. Roth 401k’s, 403b’s and 457b’s all operate similar to a Roth IRA (as discussed above) in that the money is funded with post-tax dollars and distributions are tax free.**
**Health savings accounts (HSA) are tax advantaged accounts that are available to individuals who are enrolled in a qualified high deductible insurance plan. They may be employer sponsored but may also be opened on your own. Receipts saved from unreimbursed medical expenses can be used to get tax free funds from your HSA that can be used for any purpose, even years after the expenses were incurred.**
Advantages
High annual contribution limits. For 2021 the limit is $19,500, $26,000 if 50 or older.
Opportunity for free money if your employer provides a match.
Tax deferred growth until the time of distribution. Contributions reduce current taxable income.
Funds in employer sponsored plans are protected from creditors in most cases.
Retirement account balances are not included as assets on the FAFSA. Withdrawals from a retirement account need to be reported on the FAFSA.
Many retirement plan sponsors offer loan options on your account balance.
Disadvantages
Early withdrawals (generally before age 59 1/2) will be subject to a 10% penalty as well as taxes.
Often have limited investment options.
May be accompanied by higher fees.
Required minimum distributions at age 72.
Individual Brokerage Account
A brokerage account is a type of investment account that is often referred to as a taxable account. This is because contributions are made with after tax dollars and taxes are owed on realized gains within the account as well.
Advantages
No contribution limits.
Access to funds without penalty.
Tax loss harvesting is possible (the ability to offset $3,000 of ordinary income with $3,000 of realized investment losses).
Virtually limitless investment options.
Parental assets reduce financial aid by up to 5.64% vs. up to 20% of student owned assets.
No required minimum distributions.
Disadvantages
No tax advantages.
Brokers may charge a commission for each trade made.
Whole Life Insurance
Permanent life insurance combines a death benefit with a savings portion. A portion of the fixed premium goes towards the death benefit and another portions goes towards savings, which can earn interest and grow. These types of life insurance plans are not for a set term. Instead, they last for the lifetime of the insured so long as premiums are paid. The two main types of permanent life insurance are whole life and universal life. Others include variable life and variable universal life.
Advantages
Withdrawals up to the total amount paid in premiums can usually be made tax free.
Growth of the cash value within these accounts are generally on a tax deferred basis.
The death benefit is generally passed to the beneficiary tax free.
You are able to take loans out on the cash value of your policy. This loan does not need to be paid back but, the policy’s death benefit will be reduced accordingly. You will also pay interest on this loan.
Cash value policies will not count as assets when filling out the FAFSA.
Disadvantages
Whole life policies are expensive and often loaded with fees. These fees and salesperson commissions are often very non-transparent.
If it is the insurance aspect that interests you, a term life policy can provide a much higher death benefit at a much lower cost.
The insurance company controls how your cash value portion is invested, not you.
It takes a long time to see positive returns, making it impossible to get back the money you put in.
If you decide to cancel your policy, you will likely have to pay a surrender charge and pay tax on any earnings.
Certificates of Deposit
A Certificate of Deposit, also known as a CD, is a low-risk savings tool that is offered by banks. Share certificates are an identical tool but instead offered by credit unions. We will use CDs to refer to both of these tools going forward.
CDs are offered in fixed length terms. The most common CD terms are 3 months, 6 months, 9 months, 1 year, 2 years, 3 years, 4 years and 5 years. At the end of the fixed term is a designated withdrawal date, known as the maturity date. On the maturity date you will have access to your original investment, known as the principal, as well as any interest that has accrued over the length of the term.
Different banks and credit unions will offer different rates and terms so it can be beneficial to shop around. You may find the best rates during promotional periods, so keep an eye out for those.
Advantages:
Fixed, predictable return in a predetermined amount of time.
Returns without much risk. FDIC or NCUA insured up to $250,000.
Useful to protect savings designated toward specific purchases.
Parental assets reduce financial aid by up to 5.64% vs. up to 20% of student owned assets.
Easy to open, comparable to opening a savings account.
Can help reduce the urge to tap into savings to spend since you will likely incur an early withdrawal penalty.
Disadvantages:
Do not have regular access to your money and will incur early withdrawal penalties, though you may be able to withdraw interest payments.
Low potential return on investment.
The initial deposit made into the CD will be the only deposit, you cannot add more, rather you would need to open a new CD.
CDs may automatically renew for the same original term if money is not withdrawn within the grace period, usually about a week.
Fixed rate of return even if interest rates rise during the term.
Bonds
Unlike a stock that provides ownership rights to a company, a bond is a loan from you to the issuer of the bond. Bonds can be issued by companies or governments. Bonds issued by companies are called corporate bonds, federal government issued bonds are called treasury bonds and bonds issued by non-federal governmental entities such as states, cities and counties are called municipal bonds. Bonds pay a fixed rate of return over a specific period of time. Riskier bonds tend to pay a higher interest rate while less risky bonds pay a lower interest rate.
Advantages
Low volatility when compared with stocks.
With fixed interest rates you know exactly what your return will be.
Bonds issued by the U.S. Treasury and larger corporations are generally very liquid.
Bonds are universally rated by credit agencies such as Moody’s.
Disadvantages
The value of bonds are subject to interest rate risk. This may not be an issue if you plan to collect interest payments and hold the bond to maturity.
Some bonds can be illiquid, such as those issued by smaller companies or bonds with a higher face value.
Inflation can erode the buying power of fixed interest payments over time.
Companies can default on your bonds.
High Yield Savings Account
A high yield savings account is nearly identical to a traditional savings account. As the name suggests, these accounts offer a higher APY (annual percentage yield) than a traditional savings account. These accounts are also typically offered by internet-only banks, but this may not always be the case. These accounts are FDIC or NCUA insured.
** In the same realm as high yield savings accounts are money market accounts. It is similar to a HYSA (high yield savings account) but with checking account features and typically limit withdrawals made per month. They are also FDIC or NCUA insured.**
Advantages
Returns without much risk. FDIC or NCUA insured up to $250,000.
Interest compounds daily.
Parental assets reduce financial aid by up to 5.64% vs. up to 20% of student owned assets.
Useful to protect savings designated toward specific purchases.
Generally pretty easy to open an account (read all the details to avoid any fees).
Easy to transfer money between accounts online.
Disadvantages
The APY can and will fluctuate when the Federal Reserve adjusts its benchmark rate.
It can take a few days to get access to physical cash. You will often need a local bank to withdraw cash from and wait for online transactions to process (some HYSA’s do offer ATM cards).
Some accounts require minimum direct deposits, minimum balances and may charge fees.
Low potential return on investment.
You are limited to six withdrawals per month before facing fees or account closure (this could also be an advantage to help prevent you from pulling from your savings).
There may a cap on the amount of money that will earn the higher APY and anything past that may earn a rate congruent with a traditional savings account (you could open multiple HYSA’s with different banks to side step this).
Money Market Fund
Money market funds are different than money market accounts. Money market accounts are more like savings accounts, while money market funds are a kind of mutual fund. They invest in highly liquid, low risk securities, cash, cash equivalents, CD’s, U.S. Treasuries, etc. These funds are offered by financial institutions and are regulated by the SEC. These accounts are not FDIC or NCUA insured so you could lose your principal.
Advantages
Same day settlement, no transaction limits.
Low risk, but not zero risk.
Parental assets reduce financial aid by up to 5.64% vs. up to 20% of student owned assets.
Highly liquid, can be valuable for short term savings.
No minimum investment requirement.
The rates will adjust with the market as opposed to a fixed rate investment.
Disadvantages
No FDIC or NCUA insurance.
Low potential return on investment.
Some accounts have expensive fees.
I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here (It’s free).
2021 seems to be looking up, in general. Vaccinations rates are up and things are beginning to open back up. I think we’re on the right track for things to be back to normal before too long. On my side of things, I had a great quarter financially.
I finally closed on my fifth multi-family rental property at the end of February. My original “on or about” date was scheduled for October and we faced delay after delay. I’m very happy that deal is finally closed. Everything went well and I managed to fill the vacant back unit pretty quickly. I’ll have more information on this property (and my other four) in my Q1 2020 rental property update within the next week or two. Subscribe so you don’t miss it!
I’m still waiting for a phone call on a single family property that I may be purchasing. I know the owner’s son pretty well and this would be an off-market deal. I’m currently owner-occupying the first two unit property that I purchased so if this deal works out I’ll likely move into the single family and rent my unit. I’m pretty excited for the possibility.
2021 Passive Income – $6,990.08 YTD
Owner Occupied Rental – $2,175.00
Rental Properties – $3,599.68
Dividends – $318.56
Interest – $17.26
Other – $879.58
Pretty great start to the year for passive income!
I like to calculate my FI (Financial Independence) ratio in two parts. The first part being passive income vs. necessary expenses. The second part being passive income vs. total expenses. The first calculation makes sense because I know that I could cut all of my unnecessary expenses if I had to, this is often referred to as “Lean FI.” The second calculation makes sense because this level of FI would require no changes to my every day life and I could continue living exactly as I am now. The purpose of these calculations is to determine how close to financial independence I am.
Passive Income vs. Necessary Expenses
$6,990.08 / $7,592.42 = .9207 x 100 = 92.07%
This 92.07% means that my passive income for the first quarter of 2021 was ~8% short to cover my necessary expenses. I owed NY state and the Federal Government a bunch of taxes this year (one of the joys of owning rental properties), and this amounted for a large percentage of my necessary expenses this quarter. I should be well over 100% after next quarter. This 8% amounts to just $200.78 per month that I was lacking in order to afford all my necessary expenses without working.
Passive Income vs. Total Expenses
$6,990.08 / $9,652.89 = .7241 x 100 = 72.41%
This 72.41% means that I was about 37.6% away from being able to afford ALL of my expenses for the quarter without needing to work. This 37.6% amounts to $887.60 per month that I was lacking in order to afford all my expenses without working.
I didn’t receive any passive income from my fifth rental property until March. Going forward, I should see a nice jump in passive income. I think my goal of $30,000 in passive income this year is very achievable.
Net Worth +6.56% YTD
I’ve been tracking my net worth since 2016 and it’s both motivating and inspiring to see the progress I’ve made. I saw a 6.56% gain during the fist quarter of 2021. That puts me way ahead of schedule for my yearly goal of 18% and I certainly can’t complain.
I use Personal Capital to track my net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you’re interested, use my link to sign-up here. (It’s free)
Example Personal Capital Dashboard
Total Amount Invested and Annual Savings Rate – $11,438.47 / 55.29%
I have managed to invest $11,438.47 into the market so far this year. More than half of this came from maxing out my Roth, I don’t expect to continue at this trajectory all year. I do think my goal of $35,000 for the year is possible though.
I’ve found that it’s extremely easy to invest money when it’s an automatic process. Trying to decide whether to invest more or save for another rental property is much more difficult, to me.
I have managed to save 55.29% of my net income so far this year. This is a great metric to track as it really opens your eyes to what an expensive month or two can do to an entire year of savings. I’m pretty much maxed out on the amount that I can comfortably save. The annual increases in my savings rate are largely due to an annual raise at my job as well as saving money from side jobs. As long as I can control my spending, I should see a nice bump this year from my new rental property.
Goals For 2021
Financial
Invest $35,000 – Current: $11,438.47 / $35,000
Increase Net Worth by 18% – Current: 6.56% / 18%
Achieve a 60% Savings Rate – Current: 55.29% / 60%
100% FI Ratio (Total Expenses) – Current: 72.41% / 100%
My financial goals are looking great so far. Honestly, the one I’m least optimistic about achieving is investing $35,000. Unless the market tanks, bringing my net worth down with it, I should be able to make the rest of these goals happen.
Fitness
Run 100 miles this year – Current: 24 / 100
Bench press 325lbs (@ ~175lbs bodyweight) – Best this year 315lbs @ 178lbs
Squat 365lbs (@ ~175lbs bodyweight) – Best this year 370lbs @ 178lbs
Deadlift 455lbs (@ ~175lbs bodyweight) – Best this year 365lbs @ 178lbs
I’ll start by saying this, running sucks. I run a mile before each of my workouts and should hit my goal of 100 miles so long as I keep that up. As far as my lifts go, I’m a touch heavier than I originally set for these goals, but I don’t care much. These goals were derived from my best lifts ever, back in 2016. These goals will get me back to as strong as I’ve ever been. My plan is to attempt a one rep max at the end of each quarter.
I did better than I thought I would on bench. I pressed 315lbs and then failed at 325lbs. I squatted more than I ever have at 370lbs and didn’t attempt anything heavier, maybe I’ll hit 405lbs this year. My deadlifts didn’t go so well. I worked up to 365lbs and then failed at 385lbs. I was about half way up with 385 and felt a little tweak in my back so I immediately dropped the weight. 455lbs feels like it’s a lifetime away so we’ll see how it goes.
Total of 2,000 blog subscribers – Current: about 1,855 / 2,000 (Subscribe here!)
Travel outside of New York – No progress
I’m way ahead of my reading goal and I don’t see any reason why I won’t be able to read 20 more books this year. 2,000 blog subscribers might actually happen before next quarter is over, which would be amazing. I would love to go on a vacation this year but, I just don’t see it happening. There is a chance I do a weekend trip outside of NY, so maybe!
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Check out Personal Capital to track your net worth. It’s phenomenal, honestly. I login almost daily to keep an eye on things. If you want to check it out, use my link to sign-up here. (It’s free)
