Sep 202016

You’ve Come into Money

By |September 20th, 2016|Blog|2 Comments

So what happens when you suddenly come into a large sum of money?  Perhaps you were on the receiving end of an inheritance, got lucky in the lottery, or you found a bunch of Aztec gold in your basement.  How  you got the money doesn’t really matter, but for the purposes of this discussion I’m referring to some sort of one-time lump sum that you received.  If you suddenly got a big bonus at work, that qualifies for this discussion, if you suddenly got a big raise it doesn’t.


Thanks to 401kcalculator.org for the picture.

Don’t shout about it on Facebook

Something like 40% of the population considers themselves to be the world’s foremost expert on how you should spend your money.  Almost 100% of the population has a problem they think can be solved by applying more money to it.

If you suddenly come into some money people may overcome their sense of propriety and start bugging you about it.  The larger the amount is the worse it will be.  The more it appears that you didn’t “work” for the money (inheritances and lotteries for example) the worse it will be.  Depending on how you came by the money some people may already know that you came into some money.  That’s really too bad.  You get permission to tell your CPA, and your spouse.  (The rule for spouse’s and CPA’s is that if you can’t trust ’em, replace ’em.)

I know a number of 20 somethings whose own parents don’t know that they are sitting on a six figure net worth.  Ultimately, there just isn’t any reason for most people to know about your financial situation.

Additionally, if you haven’t told anyone about the priceless treasures you dug out of the dirt in your basement, I estimate that it lowers the chances that you’ll be visited by the vengeful spirits of the restless dead.  How would you like it if people started showing off treasure you hid long ago?


Make sure that you understand the tax implications of your windfall!  Gifts generally avoid taxes and the taxes are generally the responsibility of the giver.  Inheritance can have a tax associated with it depending on the size of the inheritance.  Bonuses are taxable at your regular rate, and could possibly push you into another tax bracket. (Which only matters for the extra money).  You want to make sure that you account for the taxes ahead of time and set aside to enough money to pay them.  You don’t want to pay off a bunch of debt, or your house, and then realize that you owe the IRS $250,000 in taxes. It can help if you increase your 401K contribution substantially and use the windfall money to eat, rather than your salary.

Even the Aztec gold gets taxed.  If you found a lot of it you might even end up giving up roughly half to taxes.  You might feel inclined not to report this found gold on your taxes, but I wouldn’t take that risk.  The curse of a doomed civilization is enough to worry about, you don’t want to wake up in a cold sweat over the IRS too.

Pay off Debt, Save and Invest

If you have high interest debt paying it off is the top priority for any money that isn’t earmarked for “makin’ sure you don’t die”.  Just because this is “found money” doesn’t change anything.  If you’ve ever played a real time strategy game you should know this.  The first thing you do is get your economy stable.

We Require More Minerals

If you don’t have any debt, great!  You should strongly think about investing the windfall?  While, you could go ahead and simply stick it all into the index fund of your choice all at once.  Instead I recommend parceling the money out into 12-24 equal pieces and only investing one piece per month until you are fully invested.  This will average your money into the market and reduce your risk of buying at a market top.  This is called dollar cost averaging if you’d like more information on the subject.

If you came into Aztec gold you may want to do this as well.  Rather than selling it all as a lump sum, instead sell some every month and transfer it into the market.  This way you reduce your risk of selling it all at a particularly low price.  Investing your filthy lucre is probably a better idea than sitting on it.  The antediluvian ghosts which haunt you now have been around long enough to appreciate the power of compound interest. Investing wisely will make those unearthly horrors far less likely to vent their frustration on you.



Sep 142016

How much should I save by 25?

By |September 14th, 2016|Blog|6 Comments

The answer here is obvious. It depends, or variously as much as you can.


Alright.  Probably what you care about is how much your peers have saved by this point? Well according to the US census bureau the median person between the ages of 25-34 has $6,676, in Net Worth.  This is possibly due to a significant amount of student debt overhang.  The problem with this is that the number is either too low or too high depending on the context of your individual situation.

Let’s say you graduated with a high school diploma and skipped college going straight to work.  That gives you roughly 7 working years by the time you are 25.  If you obtain a job making roughly $12 per hour, or ~$24,000 annually you need to save roughly 20% of that (~$4,800).  Over 7 years that adds up to $33,600.  You don’t have any reason to have student debt, a car payment, etc so that should leave you with a net worth of $33,600.  If you’ve been clever with your retirement accounts the way taxes work could have netted you an additional $1,000 per year, putting you at $40,000.  If the money has been invested over the last seven years in an S&P 500 index fund then you should have something more like $55,000, so that’s your answer.  You should have $55,000.

If you went to college and ended up with the median student debt of $15,500 and the median income of $50,000 you’ll wake up 22 with a net worth of -$15,500 and the interest clock ticking.  Fortunately you should be able to pay that off in two years saving about $10,000 per year.  The amount of debt interest adds at this point isn’t super significant for small payoff periods (like a few years).  You should end up 24 with between $2,000 and $4,000 of net worth and no debt.  That just leaves one year to catch up to the high-school diploma, but you won’t, you save only $10,000 this year.  You should have $13,000, adjusted by whatever your student debt actually was.  

Interesting point, it’s actually a little hard for the dude with the college degree to catch up with the high school degree dude. Assuming that each of your investments earn 10% in the future and you each save 20% of your income, high-school dude saves about $5000 and earns another $5000 from investments for a total of $10,000 being added to his net worth annually.  College guy saves about $10,000, but is only earning $1,300 from his investments, adding $11,300 to his net worth annually.  Sure, college guy catches high-school dude eventually, but it’s sure harder than you’d think.  

If high school dude had saved just a little bit more, or had an extra year of work college guy might never have caught him. Investment earnings matter!

How do you make sure you do all of this saving and investing sensibly?  Well, first off you’ll want a Roth IRA (contribution limit currently $5,500).  High school dude has been almost maxing his for the last 7 years.  College guy just got started, and needs to also be putting the money in a 401k. Now these are generally accepted guidelines to retire at 65 and they also depend on investment returns in the future looking a lot like the investment returns of the past.  That may or may not be true, adjust your savings accordingly.

Sep 32016

Best Books for Beginning Investors

By |September 3rd, 2016|General Personal Finance|Comments Off on Best Books for Beginning Investors

 Nowadays, it is encouraged for young adults and professionals to start investing early. This allows his or her assets to generate more returns over time. Investing just a few years early can translate into thousands on additional funds that you can put into your retirement funds to make your future more secure.

While it’s important to invest early, it’s also important to invest wisely. Let’s take a look at several investing books that can give essential financial insight for young investors. These are extremely informative and it will leave a good impact on you.

The Intelligent Investor

This is described as one of the best books on investing per Warren Buffett. Investors can gain impertinent knowledge when reading those chapters and they can reread this book especially when the stock market goes weak or strong.

The Little Book that Beats the Market

Investing is quite simple but it’s not easy all the time. This book focuses on the simplicity of investing and it uses 6th grade math and plain language. However putting it into practice is another story.

Beat the Crowd by Ken Fisher of Fisher Investments 

This is a straightforward guide for a think-it-yourself investing. This book shows you how to consider thinking out of the box to find real opportunities that are at play. A lot of people believe that by doing the opposite of everyone else is the key to avoid faulty investment decisions – although there’s more – this book will provide you knowledge to filter the noise and avoid common investment pitfalls. Find out more about Fisher Investments Beat the Crowd.

Rich Dad, Poor Dad 

This is a classic must-read for young investors. This book advocates investments that produce periodic cash flow for the investor while providing equity value. It also stresses the importance of financial literacy and financial independence as the goal to avoid the race of corporate America.

The Most Important Thing

This is a very useful book as it teaches you the keys to a successful investment and it will also teach you about critical thinking that is important to be able to keep up with the trends in the stock market.

The Dao of Capital 

Looking to have a positional advantage in the world of investing? The methodology of Austrian investing might just be for you. This is a book by a real risk-taker practitioner in the stock market.

Buffett: The Making of an American Capitalist

Discover the value of investing. This book has changed a lot of lives of investors.

The Misbehavior of Markets: A Fractal View of Financial Turbulence

A realistic financial book ever published, this book talks about the criticism against the modern finance theory which is usually built on the underlying assumption that distributions are just normal.

The most successful investors did not achieve what they are experiencing overnight. It takes years wherein they honed their skills through research and practice. Reading these books will help you on your investment journey. Add these to your reading list – they are definitely a good read to improve your investment skills and also a great guideline for you.

Aug 312016

How You can Build the Perfect Investment Portfolio

By |August 31st, 2016|General Personal Finance|Comments Off on How You can Build the Perfect Investment Portfolio

Black MoneyInvesting isn’t for the faint of heart. Markets go up and down – historical trends have proven that the stock market moves this way. There is no such thing as achieving a “perfect performance” through market timing or even just picking out what you think are the best stocks to add to your investment portfolio, however you can definitely build a solid portfolio that allows you a margin for success and generally avoid the stress and worry that goes along with the market volatility.

Here are several considerations to keep in mind to build that investment portfolio just for you.


Aug 292016

A Million is Just a Thousand Thousands

By |August 29th, 2016|General Personal Finance|Comments Off on A Million is Just a Thousand Thousands

bank-1238322_640This is a guest post from Pauline of InvestmentZen.com

Saving a million dollar is not a big deal. You just need to save $1,000… a thousand times. Whether or not that will be enough for retirement is another story. At 4% safe withdrawal rate, the million you are going to save will generate $40,000 yearly to cover your expenses. That should be amply sufficient if your mortgage is paid off and your kids out of the house, but that is not a lot if you still have these expenses.

Anyway, back to our million. Saving a million is daunting. Like, running a marathon scary. But if you break your big goal into a much more achievable $1,000, then it is starting to look more realistic. How often exactly do you need to save $1,000? Well, if you are 25, and plan on retiring at age 60, you have 35 years in front of you. 420 months. Saving $1,000 a month will only give you $420,000. That won’t cut it. You need your money to work extra hard for you. You must invest the money and get better returns.

But in the meanwhile, to stay motivated, let’s celebrate the first milestone, and your very first $1,000 saved. Because we are trying to get into good money habits, saving your first $1,000 shouldn’t be that difficult. You can have a look at your expenses and spot where you are wasting money.

  • Are you bringing your lunch to work?
  • Using your car as little as possible?
  • Do you have the lowest rate on your mortgage, credit cards and loans?
  • Are you resourceful when spending money, looking for bargains or ways to get things for free?
  • Do you get value out of everything you buy?

After you have transferred your debt to a lower interest deal, canceled your cable and gym membership if you don’t use them, and brown bagged your lunch, you should find more breathing room in your budget. Maybe the first thousand is there already. Now you can invest your $1,000 and watch them grow.

So we have $1,000. At an average of 8% over 35 years, it will grow to $16,400. That’s 16 thousands out of the 1,000 we need. 984 to go. Thank goodness we have 35 years.

Let’s try to invest $100 per month for the first five years.

  • $1,200 invested for 34 years will turn into $18,200
  • for 33 years, you’ll have $16,800
  • $15,500 for 32 years
  • $14,300 for 31 years
  • and $13,200 for 30 years

Yay, we have now saved $78,000! Plus our initial $16,400, our nest egg is almost at six figures, $94,400. And don’t tell me it is hard to find $100 a month to invest between the ages of 25 and 30. You can cut down on the partying a little bit, use your raises at work and live on last year’s income, keep living with roommates to save at least $200 a month on rent, etc. The first thing you should do when you start investing, is actually maxing out your 401k, or at least taking advantage of your company match. If they match your $100/month, you now have the opportunity to get almost $200,000 in your nest egg.

That is, if you don’t invest one cent after age 30. But since we still have 800 thousands to go to reach our million dollar goal, we need to keep going. With only 30 years to keep saving and investing, growing a $800,000 nest egg will require a $520 monthly sacrifice on your part. We’re stepping things up. But by this time, you will be making way more money at work than when you started, and investing $6,000 a year can be done without too much effort if you once more enjoy some company match. A 3% match on a $50,000 income is $1,500, or 25% of your savings needs accounted for. Add to that the tax saving, and your paycheck should be reduced only by $320 or so.

That is $10 a day, not so bad to retire a millionaire isn’t it?

Aug 292016

Shell Games

By |August 29th, 2016|Blog|1 Comment


Don’t give this guy your money. Photocredit: Philip Robins.

I was on the street corner near Checkpoint Charlie this weekend and I noticed that some fellows were playing some sort of shell game on the ground.  For those not aware a shell game is played by placing a small ball underneath one of three plastic cups then moving the cups around so as to confuse the balls location.  The player then chooses one of the cups, if he chooses the cup with the ball under it he wins, usually a wager is placed on this.  This particular version of the shell game used a tiny white ball, three matchstick boxes, and took 50 euro wagers.

It caught my eye immediately because the game looked fair.  The man “running” the game paid out money when he lost, and occasionally bystanders won.  What was really striking however, was that from a distance I noticed that he’d occasionally slip and accidentally reveal the ball under one of the matchstick boxes.  If the folks playing the game chose the box that I had seen the ball get revealed under, they would win.  This further reinforced my belief that the game was fair.  After all, the guy running the game didn’t palm the ball right after I had accidentally seen it.

This looked like a game that could be won.  Simply wait long enough for the game runner to slip up, bet 50 euros and then win by picking the matchstick box that he’d revealed the ball under.  I waited long enough to see a tourist do precisely that.  He stepped into the game, made a bet on an accidentally revealed box and the whole game came to a halt.  The game runner made sure he got the man’s 50 euros before the box could be turned over, there was a short discussion between the tourist and game runner, but when the tourist flipped the box there was no ball.  The game runner flipped the other box and there the ball was…

It’s called a shell game for a reason

Shell games are practically synonymous with scams.  The operators of these games know it, and they know that you know it too.  So how in particular did this scam work?  I saw the operator take about 200 Euros from tourists over the course of 10-20 minutes, and it wasn’t until a few hours later turning the thing over in my mind that I had figured out exactly what was going on.

Step One: Build their trust

This was accomplished through the use of shills, people who stood around, playing the game, winning and losing several times before any actual players had even considered it.  In this case probably 3 or 4 people were working with the operator of the game to create the illusion that people were happening upon the game playing a few times, winning some, losing some, and walking away, as though this is just something one did in Berlin.  A little gambling on the streetcorner, why not?  After the fact, I realized that none of them were appropriately excited when they won 50 Euros, at least not excited in the way I would be excited.  They really didn’t seem to care whether or not they won, simply going through the motions of handing money back and forth to the operator of the game.  All of the playing at this point happened very very fast.

Step Two: Appeal to their greed

The other important part here is that the game was made to look winnable, not simply because other people won it, but because you could understand why they won or lost.  Almost always the operator would slip up and reveal the location of the ball just before a player had to make his choice, so you would almost always know what the “right” answer was.  When one of the shills picked the one you knew was the winner they would win, when they picked one you knew was a loser they would lose.  This is a game you could understand.  This was a game that you could beat, and they’re playing for 50 Euros a time.  Not enough that you can’t afford to risk it, but not so little that it wouldn’t be exciting to win.

So you watch the game play out maybe a dozen times, then you make your move.

Step Three: Gaslight the player

You offer to bet and the operator stamps on the matchbox you choose, so that you can’t reveal it until he knows that you’re going to pay he says.  You have to give him the 50 euros first and then you can flip over the box.  This negotiation takes a little while, and it accomplishes three things.  First, the operator gets your money and knows that you won’t skip out on him.  It’s harder for him to get you to pay after you know that you’ve lost after all.  Second, it takes your mind off where the ball is and onto convincing this guy to let you bet, after all you have a sure thing.  Third, it prevents you from doing any potentially embarrassing things like flipping all of the cups and revealing that there was no ball in any of them.

Taking your mind off the ball is important because, you have to remember, you’ve just seen him “accidentally” reveal the ball under this box you picked.  Without this 30 seconds of negotiation you’d know you’ve gotten cheated, with the extra time, did you really see what you thought you did?  Who knows?  Even so, what are you going to say?  “You slipped up and showed me the ball under this cup, I was trying to cheat you good sir!” After all the ball did turn out to be under the other cup, maybe you just made a mistake.  You let him keep your money and walk away.

Why am I telling you this

Reminiscing on the whole thing I’m strongly reminded of the experience of new people, and frankly some old hands, with the stock market.  The steps feel similar.  First, you see other people getting rich.  Second, you selectively remember the times you were right about stocks, especially stocks you thought were good which then enjoyed a significant upward run.  Third, when you actually get involved with your money it doesn’t turn out at all like you expect, but you keep your mouth shut because no one likes to brag about the mistakes they made in the market, so then the next generation gets ready to invest and…

In total I think that means there are a couple things to keep in mind about the market:

  • Making money in the market isn’t easy.  Beating the market by a few percent over 20 years is really great, really rare, and sounds really boring.  That’s the best you can hope for.  The average dollar in the market does average.  The average person in the market does much, much worse.  You can do as good as the average dollar just by indexing into a total market fund.
  • Selective memory is your enemy. Keep an actual record of your investment ideas before you start investing, in the mean time your money goes into index funds.  Though its important to remember that there are day trading strategies which work with play money but not with actual money.  Your investments have an effect on the market only when they’re real, and sometimes that effect can dry up the source you thought you were making money from.
  • Admit your mistakes.  It’s a lot easier to learn from your mistakes if you’re willing to talk to other people about them.  It’s also important to keep in mind that investing is a game of probabilities, not everything will work out, and not everything that doesn’t work out is necessarily a bad idea.  It’s always important to try to determine if you lost money because you were on the other end of a shell game, or a fair casino game.  Losing the dollar in either case sucks, but whether or not it was possible for you to win is important!