Taxes, Avoid Them If You Can

Old joke:  Two tax advisers meet for drinks after work. The first one says, “What’s the difference between tax avoidance and tax evasion?” The second one answers, “Ten years in jail.”

But seriously, you work very hard for your money and should do anything legally you can to avoid paying taxes that you don’t have to.

I first started to look into a way to limit my family’s tax exposure in 2012 when I heard Mitt Romney made like $20 million and hardly paid anything in taxes.  Now at that level of income/wealth, I’m sure he is doing all kinds of tax avoidance based on recommendations from his tax team of advisors.  First thing I did was pull out the tax tables and look at them.  At the highest rate, investment income is taxed at about half of what regular income is (20% vs. 39.6%).  I don’t know about you, but I certainly do not like the idea of making more from my salary only to have the government take a higher percentage.

The left side is the income tax you pay on income you earn.  This is the income you work hard for.  You are trading your time for money.

The right side is the income tax rate you pay on long term investments and qualified dividends.  This is the income you have planned and saved for.  Once built up, it does not require you to trade your time for money.  This income is generated whether you are working or not.  You want this type of income to be Financially Independent.

For simplicity sake, assume the $75,299 is after any deductions and/or tax credits.  That means you can actually make more than $75,299 since you will either get your standard deductions or itemized deductions and/or tax credits.

Left side, If a married couple was working hard and trading time for income and made $75,299, they would pay $10,364 in income taxes.

Right side, If a married couple was not working and had money in a normal, after-tax brokerage account, they could make $75,299 and pay $0 in taxes.

When I really understood the chart above, it was a real eye opener.  I simply don’t understand why this kind of information is not taught to everyone and in a simple manner, in high school.

If you would like to see someone who has been doing this for a few years, check out, Never Pay Taxes Again.   He puts his family’s tax returns online each year.  This site taught me a few things.

Thanks for stopping by and hope the post has been helpful.

 

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February 2017 Budget Update

Here is a screenshot from the Personal Capital app I use on my iPhone.   I have our budget set for $6,000 a month.  You can set this yourself or Personal Capital can do it for you based on past spending.  The outer ring shows the current month and the inner ring shows last month.  We were $1,329.34 over our budget of $6,000 for the month of February.  You can also see we were $633 over what we spent in January 2017.

 

 

 

 

 

 

 

Where did we go over:
– Mortgages – over $625.  $505 for annual HOA dues and $120 over for rental house application fees we will be moving into.
– Home Maintenance – over $452.17.  Various items need to be done to sell our Kansas house.  We are not done on this one.
– Medical – over $339.55.  My son had a concussion in November.  Still not paying for this yet either.
– Cable/Satellite – over $183.33.  Set up and paid for first month in new Florida house.  So basically paying for cable and internet in two houses.  We’ll be over in this category until sometime in the summer.

Tracking with a tool like Personal Capital is a great alternative to budgeting.  You still can’t spend more than you make and expect to get wealthy.  Just tracking your spending to see the big items is extremely helpful and can show you areas to cut back a little.

 

I knew we had done some items around the house to get it ready to sell and I knew it would be a little higher than normal.  I was not sure why our Home Maintenance category was so high, so I clicked on it and get this view.  Well, I knew we have been doing quite a bit around the house to get it ready to sell, but did not think it was that high.  The check to The Maids was normal, but check #1232 was not.  We hired a handyman to do a couple items around the house.

 

 

 

 

Once you set up all your accounts in Personal Capital, it will go fetch new transactions and attempt to categorize them for you.  You can also change each transaction in case Personal Capital gets it wrong.

Budget tracking is only one area Personal Capital helps with finances.  It has some other really cool tools in terms of portfolio tracking and retirement planning.  Personal Capital’s iPad app is probably the best of all platforms.  It is available on web browser, iPhone, iPad, and Android.  All the platforms sync together with a single login.

Thanks for stopping by and hope the post has been helpful.

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Up $41,603.36 – February 2017 Investment Update

$41,603.36, another huge month.  As a Dividend Growth Investor, I would prefer the stocks to be cheaper so I can buy more shares.  While it’s nice to see the pile of money growing, my main goal is to replace my family’s income with dividend income.

Let’s take a look at some numbers.

DateValueSavingsDividends$ Increase% Increase
1/1/2017768,099.62
1/31/2017815,352.921,854.976,563.3344,675.265.81
2/28/2017858,654.941,698.66041,603.055.10
Year To Date3,553.636,563.3387,158.0011.32

The stock market continues its great run since Trump was elected president, but look below at the picture.  I want to show you how these 4 boring, non-tech stocks are absolutely crushing the market.  The stocks are MO, PM, KO, and ABBV.  I am using the approach that Jeremy Siegel laid out in The Future For Investors.  My year to date gain is 11.32% vs. 5.94% for the S&P 500 or almost double the S&P 500 benchmark.  Remember, 85% of  financial professionals can’t even beat the S&P 500 each year.  And don’t get me started on the abysmal performance of Target Date funds that most 401k’s push.  Those are worse than the S&P 500.

Here is where February’s gains came from:
$41,603.05 – Account Value Appreciation/Depreciation  (stock price going up)
$0 – Dividends Reinvested (Dividend payments)
$0.31 – Interest Reinvested

No dividends paid out this month and that’s okay.  Most companies pay their dividends out quarterly, so for me the next big dividend payment month will be April.

From over 20 years of investing I know the market cannot keep up this pace of gains.  So is it time to sell?  Nope.  I do have protection mechanisms in place on all 4 of the stocks to keep me from losing a lot of money in the even of a market downtown.  It’s automatic and unemotional.  I don’t have to even be in the country for it to execute.  It’s easy to set up too.  I explained what it is and showed you how to set it up in this post.

I’ll continue to update on my portfolio performance monthly to show the ups and downs of the capital like I mentioned in this post.  It’s something all of us have to get used to.

Thanks for stopping by and hope the post has been helpful.

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401k vs. Roth 401k

One of the most important decisions you need to make is whether to put your retirement money into a Roth or a Traditional 401k.  The decision is a personal one depending on your view on taxes.  On the traditional 401k, you get a tax break now, but pay regular in tax rates when you withdrawal.   On the Roth 401k, you don’t get a tax break now, but pay no tax when you withdrawal.   Take a look at the comparison table below.

I’d personally rather pay the $25 now per $100 invested (Roth) than pay $400 later per $100 invested (Traditional).

The Roth has another advantage, no Required Minimum Distributions (RMD) in your lifetime.  On the traditional 401k, you have to start taking RMD’s at 70 1/2.  The government wants that tax revenue.  In english, this means under the Roth, I never have to take any distributions in my lifetime.  I can pass all of the money in the Roth to my kids tax free to them and they don’t pay taxes when they pull from my Roth.  It is a huge consideration if you want to keep wealth in your family and not give it to the government.  I know I do.

I have been putting money into the Roth since my company starting matching on the Roth in 2016 and will continue to do so.  I stopped putting money into the traditional 401k altogether.

What is the ‘Rule Of 72’
The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:

Formula:  Years required to double investment = 72 ÷ compound annual interest rate

http://www.investopedia.com/terms/r/ruleof72.asp

Thanks for stopping by and hope the post has been helpful.

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Hope, Freedom, and Dreams

I hope everyone learns how to get better with managing their finances.
I hope everyone achieves Financial Independence as early as possible.

I hope everyone gets wealthy.

I hope everyone’s fears begin to diminish.  Fear of losing a job, fear of not having enough for their families.  These need to go away. 

I hope everyone has enough wealth to do the work they love and pursue their passions.

I hope everyone has more freedom and time for their families.

Think about what you love to do. What you would do if money was not a concern. You know what I’m talking about, where you lose track of time, stay up later than you should, and have more energy after working on it.  You’d even do it for free. 

That’s what you should be doing.

That’s the what the world needs you to do.

That’s when the world starts to become a better place.

I will show you exactly how my family is getting to Financial Independence and how you can do it.  It is not complicated, but it is not easy.

Let’s get you in a place of Financial Independence. A place full of hope, freedom, dreams, and completely free from fear.

I want you to find your hope, freedom, and pursue your dreams for you and your family. 

Thanks for stopping by and hope the post has been helpful.

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I Got A 5.7% Raise Last Week

The main purpose of this post is to show you what a dividend increase looks like using a real wold example.  The numbers for my position in Coca-Cola are not mind blowing, but can be if the number of shares are scaled up.

Coca-Cola raised their annual dividend 8 cents or 5.7%.  The annual payout in 2016 was $1.40 per share. After the increase, the annual payout in 2017 was $1.48 per share.  8 cents  per share might not sounds like a lot, but it can be depending on how many shares you have.  I currently have 460 shares of KO.

Here’s what my numbers look like before and after the increase:
2016 – 460 x $1.40 = $644
2017 – 460 x $1.48 = $680.80

Using my portfolio, I will get $36.80 more of income after the increase.  $36.80 is not going to change my family’s lifestyle, but over time with more dividend increases, buying more shares and dividend reinvestment, the amount of dividend income becomes more impressive.


The chart above shows KO’s dividend history since 2009.  Let’s look at KO’ dividend increase history and run another example.  For simplicity sake I will use the same 460 share number I used above.
2009 – 460 x $0.82 = $377.20
2017 – 460 x $1.48 = $680.80

In this example, I would be making $303.60 more than I did in 2009.  Almost double the amount of income in 8 years.  I don’t know too many people who are making double at their day jobs than what they were making in 2009.  And you are in complete control of your dividend income.

If you want to run your own scenarios or dream a little, head over to this tool and put your own numbers in.  For the scenario in this post, I would use $680.80 for the “Beginning Annual Dividends” and 5.7 for “Annual Dividend Percent Increase”.  I always use 100 for “Number of Years” since I like to see what my grandkids will have.

I understand that dividends can get cut, but you dramatically reduce that risk by sticking with the Dividend Aristocrats.  The Dividend Aristocrats also beat the S&P 500 index in rate of return as well.  In English, the Dividend Aristocrats are paying you cash every quarter and grow faster (appreciate) than the S&P 500.  It’s an awesome combination and I have seen it  personally in my own portfolio.

Thanks for stopping by and hope the post has been helpful.

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The Importance Of Rate Return

Rate of return is the most important item to get really wealthy.  There is so much focus on budgeting and spending less than you make in the personal finance industry.  You do have to live on less than you make so you have something to save, but you don’t have to make yourself miserable.  I firmly believe that the journey is very important.  My wife and I don’t want to save everything to be rich later and not enjoy our lives now.

To illustrate the importance of rate of return, I built a spreadsheet that compares the growth of savings using 3 different rates of return, a Target Date Fund, the S&P 500, and my (FI Warrior’s) rate of return.  I used the most recent 5 year for all three.  I only have 5 years of data on myself and I wanted to be fair.  I chose a Target Date Fund since most people have those in their 401k’s and they suck.  Target Date funds routinely perform worse the the stock market average.  The S&P 500 is the benchmark everyone gets measure against.  A lot of people of those in their 401k’s too.  An S&P 500 index is a decent option.  I have the ability to do a “self directed” 401k.   This means I can buy individual stocks or any mutual funds that Charles Schwab offers.  Not many people have this option in their 401k, but if you do have it, get into it.  Today.  I was not able to get into it until early 2012 and you can see my portfolio take off in the graph at the top of the page.

For savings amount, I chose $1,200 per year.  That is only $100 per month.  You can change this yourself if you download a copy of the spreadsheet.  I put in $18,000 a year since that is the IRS maximum for 401k’s in 2017.

I also run the numbers out 100 years because it is important for us to build and leave a legacy for our grandkids.  The link to download your own copy of the spreadsheet is at the bottom of the table.  You can tweak the gray cells with your own numbers if you don’t like the assumptions I use in this post.

Let’s highlight a couple points in time from the spreadsheet so you can really see the importance of the rate of return using a couple key points in time.

Save $1,200 a year from Age 25 to 65.  For year 82, I used, grandkids are born at my age 60 and amount it is worth when the grandkids are 46 years old, my current age.  A fun little what if scenario for me.

Save $18,000 a year from Age 25 to 65. For year 82, I used, grandkids are born at my age 60 and amount it is worth when the grandkids are 46 years old, my current age.  A fun little what if scenario for me.

Rate of return on investments is extremely important, but does not get as much attention as it should.  Most of the focus is around budgeting and deprivation to become wealthy.  Spend a little time getting educated on investing to increase rate of return and enjoy the journey of life.

Thanks for stopping by and hope the post has been helpful.

Posted in Dividends, Investing, Stocks | 2 Comments

Don’t kill the hen that lays the golden eggs

A lot of us have heard this story since we were kids and here is a refresher.

A man had a hen that laid a golden egg for him each and every day. The man was not satisfied with this daily profit, and instead he foolishly grasped for more. Expecting to find a treasure inside, the man slaughtered the hen. When he found that the hen did not have a treasure inside her after all, he remarked to himself, ‘While chasing after hopes of a treasure, I lost the profit I held in my hands!’

How does this relate to Financial Independence?
Dividend stock = Hen
Dividend Payments = golden eggs

When you own good quality dividend stocks, they pay out a portion of their profits in the form of dividends. Most companies pay them out every three months or quarterly. Great companies have a long track record of paying and increasing their dividends annually. These companies are known as the Dividend Aristocrats.

Main purpose is for your money to earn more money forever. If you sell your stock for capital gains (kill the hen), then you loose the ability for the stock to pay you ever increasing dividends (golden eggs). Once you sell the stock, it’s gone and no longer produces income.

Would you rather have capital gains to buy something like a house or car or would you rather have increasing income coming in to your bills forever?

My goal is to figure out how to get more hens laying more and more golden eggs.

Thanks for stopping by and hope the post has been helpful.

Posted in Dividends, Financial Independence | 2 Comments

Any Monkey Can Beat The Market

I am linking to a couple articles for you to read.  The articles will show you how poorly the financial industry/experts are at beating the market.  I wish these types of article/stories made the major news cycle every year.  With a little bit of knowledge, you will easily be able to beat the market, earn great returns, and not pay fees to the financial industry for their sub par performance.

Monkeys Beat the Market

Excerpt – “Give a monkey enough darts and they’ll beat the market. So says a draft article by Research Affiliateshighlighting the simulated results of 100 monkeys throwing darts at the stock pages in a newspaper. The average monkey outperformed the index by an average of 1.7 percent per year since 1964. That’s a lot of bananas!”

 

84% of large-cap funds generating lower returns than the S&P 500 in the latest five-year period

Excerpt – “That hot-shot mutual fund manager you’re betting on to make you rich might be generating returns that fall far short of the benchmark
stock index the fund tracks.  The longer-term outlook is just as gloomy, with 84% of large-cap funds generating lower returns than the S&P 500 in the latest five-year period and 82% falling shy in the past 10 years, the study found.”

Wait, a monkey throwing darts to pick stocks  outperformed the S&P 500 by 1.7% and beat 84% of the “experts” since 1964?  Yep.  Just buy an S&P 500 index fund and you’ll beat 84% of the “experts”.  There is no way I’m paying the experts 1% of my portfolio to not beat a monkey.  I’m also not going to listen to any of their picks either.

If anyone tells you they can predict how the stock market is going to do in the future, run away, go buy a monkey, darts, and the stock pages for the monkey to throw darts at.  You will pay way less in fees and beat 84% of all the experts charging you to earn you less money.

Thanks for stopping by and hope the post has been helpful.

 

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Protect Yourself

Today I am going to talk about the tool I mentioned last week in my January Portfolio update.  I use it so I don’t lose too much money.  The tool is the “Trailing Stop Sell” order.  I have Trailing stop sell orders on all my stocks in all my accounts.

Protecting losses:
I put Trailing Stop Sell orders in place immediately after I buy a stock.  So if a stock goes down immediately after I buy it, I will only lose the amount I chose to.  I usually set mine between 5-10%.

Protecting Gains:
The nice thing about the Trailing Stop Sell orders is that it also protects gains as well.  The same order I put in right after buying will still be in effect if a stock goes up past where I bought it.  When the price of the stock moves up, the sell price moves up too.  It adjusts automatically and by the minute when the stock market is open.   Once the stock hits a new high, a new sell price gets set.  The sell price will be based on that new high even it takes several days, weeks, months to go low enough to hit my 5% trailing stop sell order price.

There is a lot on the screen above.  Let’s look at the important part for setting up the order on the screenshot below.

Action: Sell.  I set it to sell all the shares of ABBV in the account
Quantity: Number of shares you want to sell.  You don’t have to sell all shares.
Venue: Smart.  Unique name to Schwab.
Order Type: Trailing Stop
Trailing amount:  This is the amount you are willing to let the stock pull back from its high.  I chose 5%.  % is in the next choice box.  I could have also selected a $ amount.
Timing: GTC which means “Good Til Cancelled”.  My trailing stop limit will stay in effect until I cancel it.
Click Review button to review the order.  And OK on the next screen.

That’s it.  I now have a Trailing Stop Sell in place in this account for 26 shares of ABBV.

Here is what the screen looks like now.

Here is the I mportant part of the screen.

The first order in the list is the Trailing Stop Sell I just created for ABBV. The Trigger Value column shows the price when I placed the order minus my 5% trailing stop or $57.74.  ABBV was trading at $60.78 when I placed the order.

Here is what the same order looks like about a week later.
ABBV must have gone up a little since my Trigger Value moved up a little to $57.96. I did not have to do anything else, the Trigger Value just moved up since the stock moved up at some point.

Once in place, these orders are automatic and take the emotion out of the stock market.  Like I mentioned in my other post, you can even be out of the country and completely disconnected and the order will execute.


I was here when one of my sell orders automatically executed. I did not know everything sold off until I got back in the US and had cellular coverage. Pretty awesome.

 

 

Thanks for stopping by and hope the post has been helpful.

Posted in Investing | 2 Comments

January 2017 – Budget Update

Here is a screenshot from the Personal Capital app I use on my iPhone.   I have our budget set for $6,000 a month.  You can set this yourself or Personal Capital can do it for you based on past spending.  The outer ring shows the current month and the inner ring shows last month.  We were $696.29 over our budget of $6,000 for the month of January.  You can also see we were $4,286 under what we spent in December 2016.  Gifts, painting the exterior of our house, and 6 months car insurance premiums (teenage driver) were the budget busters in December.

Where did we go over:
– Medical – over $238.  My son had a concussion in November.  We are done not paying for this yet either.
– Dues – over $150 for my wife’s Florida Teacher’s license.
– Cable/Satellite – over $118.  Last payment on NFL Sunday Ticket.
Gifts – over $300 due to some Christmas and New Year’s Eve fun.

Tracking with a tool like Personal Capital is a great alternative to budgeting.  You still can’t spend more than you make and expect to get wealthy.  Just tracking your spending to see the big items is extremely helpful and can show you areas to cut back a little.

I was not sure why our Healthcare/Medical category was so high, so I clicked on it and get this view.  Braces (Orthobanc Ob) is normal but the $238.83 charge is not (concussion).  I also like how it gives you a graph that shows the date and amount of transaction.

 

 

 

 

Once you set up all your accounts in Personal Capital, it will go fetch new transactions and attempt to categorize them for you.  You can also change each transaction in case Personal Capital gets it wrong.

Budget tracking is only one area Personal Capital helps with finances.  It has some other really cool tools in terms of portfolio tracking and retirement planning.  Personal Capital’s iPad app is probably the best of all platforms.  It is available on web browser, iPhone, iPad, and Android.  All the platforms sync together with a single login.

Thanks for stopping by and hope the post has been helpful.

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Up $44,675.26 This Month – January 2017 Investment Update

$44,675.26 is a lot of money, especially for one month.  I can almost pay for 2 years of my daughter’s college with 1 month’s worth of gains.  Unreal.  As a Dividend Growth Investor, I would prefer the stocks to be cheaper so I can buy more shares.

Stats:
Beginning of January: $768,099.62
End of January: $814,473.54

I understand the stock market has had a great run since Trump was elected president, but look below at the picture.  I want to show you how these 4 boring, non-tech stocks are absolutely crushing the market.  The stocks are MO, PM, KO, and ABBV.  I am using the approach that Jeremy Siegel laid out in The Future For Investors.  My year to date gain is 5.81% vs. 1.90% for the S&P 500 or over triple the S&P 500 benchmark.  85% of  financial professionals can’t even beat the S&P 500 each year.

Here is where January’s gains came from:
$38,111.64 – Account Value Appreciation/Depreciation  (stock price going up)
$6,563.33 – Dividends Reinvested (Dividend payments)
$0.29 – Interest Reinvested

From over 20 years of investing I know the market cannot keep up this pace of gains.  So is it time to sell?  Nope.  I do have protection mechanisms in place on all 4 of the stocks to keep me from losing a lot of money in the even of a market downtown.  It’s automatic and unemotional.  I don’t have to even be in the country for it to execute.  It’s easy to set up too.  I will explain what it is and show you how to set it up next week.

I’ll update on my portfolio performance monthly to show the ups and downs of the capital like I mentioned in this post.  It’s something all of us have to get used to.

Have a great weekend.

Thanks for stopping by and hope the post has been helpful.

 

Posted in Dividends, Investing, Net Worth, Our Story | 3 Comments