Gen Y Financial Freedom

What to Do Instead of Investing in Index Funds

2016-02-18T05:39:00.000-05:00

Hey everyone.

Two days ago, I wrote about how investing in index funds ("passive investing") is only something you should do if you're investing for extraordinarily long time frames (i.e. for retirement, which should be 30 to 35 years away). Although I encourage you to go back and read my previous post, I'll reiterate the basic thesis behind my last post. It's that although the S&P 500 (an index or group of stocks that is a gauge for how the stock market is doing as a whole) has a compound annual growth rate of approximately 9% for the past 87 years, returns on the S&P 500 or the broad stock market in general can vary wildly from year to year, as demonstrated by this chart. If you don't have an 87 year time horizon or even a 20 year time horizon for your money, but want to make it work for you so you can reach financial objectives that are 3, 4, or 5 years away - i.e. buying a home, taking a trip around the world, buying a new car - what can you do to reap the benefits of investing in the stock market?

Well, before I tell you specifically what steps you can take, I must remind you that investing successfully is hard work. And it will require your dedication to it. By dedication, I mean that you must be willing to spend at least an hour a day (or 7 hours a week) doing the things outlined below. Come on, you can dedicate at least 4 percent of your week to improving your financial future, right? You can? Great! So here are the steps you need to take:

1) Determine what type of investor you are (a growth investor or a value investor) and then determine your risk tolerance by taking the following questionnaire. Growth investing and value investing are not mutually exclusive, necessarily, but they can be at times.

2) Spend time checking out the websites of stock newsletter subscription services that have thriving investor communities such as Cabot, TheStreet, The Motley Fool, or Morningstar. All of the above-mentioned websites have customer service lines that can help you decide which subscription service is best for you. Use these human resources!

3) After you have decided upon a subscription service that fits your budget and investment style (both of these criterion are equally important), then that's the time to start evaluating the newsletter's picks. When stock newsletters make picks each month, the newsletters usually include a synopsis of the company's financials, industry, and growth prospects. If you are more familiar with an industry that a particular stock recommendation falls into, and you think the prospects for the industry are bright, that might be a company on which you seek out more information. I would also suggest that you act like you're back in college and email the newsletter's editors with any questions. This will accelerate your learning curve when it comes to stock market investing.

4) Once you have your particular stock for each month set, you should dollar cost average into this investment. This way, you will buy more shares of that particular stock when the stock price is lower, and less shares when the price is higher, thereby lowering your cost basis.

Well, that was a mouthful and seems like enough for today. But come back tomorrow for a "two-fer" when I'll be discussing where to find good information on companies and what metrics to look for, along with the importance of becoming a minipreneur. Until then...

JP $

The Case Against Index Funds/Passive Investing

2016-02-16T14:36:00.000-05:00

Hey everyone.

If you've read any of my previous blog posts, you've probably noticed that I generally steer clear of conventional financial wisdom. Not because conventional financial wisdom is wrong - although a lot of it is, in my opinion - but because it's often one size fits all. All of you readers out there have different financial goals. Some of you might just want to develop an extra income to supplement your income from a job that you already love. (Let's call this Goal A.) Some of you, on the other hand, might be striving to become wealthy beyond your wildest dreams such that you don't have to work ever again and neither do your kids. (Let's call this Goal B.) Although I'm not as wealthy as I want to be just yet, I can assure you that the practices one must adopt in order to achieve Goal B are drastically different than the practices one must adopt in order to achieve Goal A.

Conventional financial wisdom - you know, the stuff you hear talking heads spouting on CNBC's personal finance shows or on websites about frugality, getting rich slowly and what not - states that when you invest in the stock market, you should invest in an index fund. An index fund is basically like a mutual fund, but one that has much lower administrative costs (the costs involved with running a money management company). One added benefit of an index fund is that its returns are directly tied to the overall stock market, more specifically whatever "index" (i.e. the S&P 500, the Down Jones Industrial Average, or the Russell 2000) it tracks. And since most mutual fund managers can't consistently achieve a rate of return that is higher than these broad indices, the argument goes that it's better to try to "match" instead of "beat" the market.

These talking heads are right in that it IS hard to "beat" the market. And they're right that index funds cost less than mutual funds, and that it's easy to lose money by actively trading in and out of stocks, just on the cost of brokerage commissions alone. (Investing in mutual funds and index funds is "passive investing" because the investor doesn't have to pick stocks herself.) Also, forget about the tax ramifications of trading stocks too frequently - they can eat up all of your profit if you don't know what your'e doing. All of this information might not serve you well though because it fails to take into account why we invest: TO MAKE MONEY. More specifically, we invest to make sure that we beat inflation (that our savings don't go down in value).

The conventional wisdom talking heads like to tout the fact that the S&P 500 index has returned 9.8% per year, ever since 1928. Really? Great! Where do I sign up to get 9.8% per year returns for the next 87 years? If you can't sense my sarcasm, let me point out the problem with this statistic for you. This chart shows the returns of the S&P 500 index starting in 1975. For argument's sake, let's go back to the year 2003 and start from there when calculating returns.

Using the chart I reference above, if we invested $1,000.00 in an S&P 500 index fund starting in 2003, we would have had $1,260.00 at the end of 2003, $1,373.40 at the end of 2004, $1,414.60 at the end of 2005, $1,608.40 at the end of 2006, $1,665.17 at the end of 2007, at the end of 2008...we would have essentially returned to our starting amount, ending the year at $1,024.08. As you already know, in 2008, the S&P 500 dropped a whopping 38%. Just imagine seeing all of the money you've worked so hard to save and invest slashed by 38%. It'd be heart wrenching to say the least, even for the most seasoned investor. If you'd started investing in 2000, you'd have lost money from 2000 to 2008!

Yes, the major stock market indices generate a return of somewhere in between 7 to 9% a year over very long periods of time. However, over short periods of time, the returns from the stock market can wildly deviate from the historical averages. And since most investors don't have 87 year time frames to invest their money, oftentimes, they are unable to capture the true benefits of investing in the stock market.

If you're an investor who is solely investing for retirement, and have a 35 to 40 year time horizon, fine, be my guest and go ahead and invest in an index fund. But if you're like me, and you invest so that you can afford to live on your own terms, even before retirement, then you need to be actively engaged in your investment decisions. That's not to say you should become a day trader or a market timer. But the index fund investment route is not the way to proceed.

If you want to know what you should do instead of investing in index funds, tune in tomorrow! Until then, take care and I'll see you back here soon.

JP $

Five Things I Learned About Life Through Playing Poker

2015-08-06T17:59:00.001-05:00

Hey everyone.

As some of you may or may not know, I'm an avid poker player. I've never played in a World Series of Poker event or anything like that (although it is a bucket list item of mine). And I'm not a professional by any means. But I've been playing fairly consistently for the past seven years and I've picked up a few life lessons along the way. Here are the six most important truths about life that I've gleaned from my time on the felt.

1) It's important to focus on things that you can control (i.e. process, decision making) and not worry so much about things that are out of your control (results).

Poker can be brutal sometimes. I remember one particular night in an underground cash game in NYC where I took the nastiest beat I ever took in my life. I picked up Aces - the best starting hand in poker - and of course I raised. My opponent reraised me. After some posturing, I moved all in. I turned over my Aces and he turned over pocket Queens. I sat there, looking at the $600 in the middle of the table, waiting anxiously for the last of the five cards to be dealt so the dealer could push the chips in my direction. Statistically, at that point, I was an 80% favorite to win, but I knew my Aces could be cracked. The flop (the first three community cards shown) were A 2 3, all of different suits. Whew! I flopped a set.

At this point, with only two cards to come, I was a 97% favorite to win the hand, but I still felt uneasy about the whole situation. I told the dealer, half-jokingly, half-seriously, "Don't do it". I was referring to him dealing out a statistically improbable situation - a Queen on the next card, followed by another Queen. Of course the next card was a Queen. I was still ahead in the hand, and still a massive favorite to win. But then I really started to sweat. "Don't do it dealer", I repeated. "Don't do it". My opponent needed the final Queen in the deck to beat me and of course, the deal burnt one card, and turned over that final Queen my opponent needed. I got up swiftly, wished everyone a good game, and then left. I felt like vomiting up the fish and chips I had eaten earlier.

Could I have done anything differently? Not really. I've played poker hands poorly before - lots of times in fact - but this time, I played my hand well. But yet, I still lost. This happens in life too. The high school valedictorian gets straight As, but gets rejected from all of her top choices. You never take a sip of alcohol, but get killed by a drunk driver. Life can be unfair, but ultimately, if you keep making good choices, you'll more than likely end up okay.

2) Being ready for profitable situations when they arise is crucial. So stay prepared and pay attention.

In live poker, because you see so few hands - maybe 40 or so an hour - most of the money that you win will probably in a few big hands over the course of any given poker session. Therefore, it's important that you're paying to your opponents' tendencies, even when you're not in a hand. If you're busy watching the game on the flat screen tv on the wall in front of your poker table, or ogling the cocktail waitress with the nice ass, you're going to be missing opportunities when they arise.

The same thing applies in life. You never know when opportunities are going to arise for you, so it's important that you have your "elevator pitch" ready. That you know the responsibilities of the person whose job you want, so that you can jump in immediately if they get fired. You get my drift.

3) It's important to reflect on your mistakes in order to get better.

In poker, all of the best players vigorously dissect the way they played a hand - whether they won or lost it - after their poker session is over. After you make a mistake in real life, you shouldn't just chalk it up to bad luck. Really ask yourself if there's something you could have done better to change the outcome. If not, that's fine. But it's important to consider that an action might have been a mistake. Even though I'm not at the top of any field just yet, I've seen this trait in others and it's done wonders for them.

4) Mental toughness can take you a long way.

Like I said earlier, bad stuff happens in poker as in life. And unfortunately, bad luck isn't distributed evenly throughout the universe. Some people are objectively more unlucky than others. Nonetheless, being able to look forward to a brighter day and push yourself onward will certainly open up more opportunities. As the saying goes, "Effort only releases its reward when one refuses to quit."

5) There are different paths to success.

In poker, the optimal strategy is to always be adapting to what your opponents are doing. However, there are general styles of play, such as tight-aggressive, or loose-aggressive. There are plenty of different styles that can lead to success. In life, the same thing applies. One can become wealthy through investing in real estate, the stock market, creating one's own business, or being a CEO. It's not so important what path you choose, so long as it's one you feel comfortable with.

Thanks for reading and stay tuned!

JP $

When It Comes to Personal Finance, Don't Focus on the "Finance" Part to the Exclusion of the Personal Part

2015-08-05T12:37:00.000-05:00

Hello everyone.

Today, on my Facebook page, I posted an article about how you should put a price tag on hard to quantify things in order to determine whether or not you are making the right financial decision. And I couldn't agree with myself more! :-D So many times in personal finance, the pundits emphasize the 'finance' part of personal finance, and understate the importance of the 'personal' part - failing to realize that the two are supposed to work in unison.

I think I've said this before in a prior post, or a prior YouTube video, but I think it bears repeating just to demonstrate my point. Many moons ago, when I was fresh out of law school, and looking for a job as a financial adviser, I was talking to a financial adviser whom I wanted to work for - let's call her "Cassie" - and she gave me some unsolicited advice. When I was telling her about the amount of student loans I had, and what that meant for the commission-based nature of financial advising, she told me that I should pay down my student loans at all costs. That makes sense to some extent, but that's not the stupid/crazy part of what she said. The crazy part came when she followed up her sentence about paying down my student loans as quickly as possible with..."even if it means not eating or skipping a few meals a day."

Now, I'm all for people getting out of debt. I'm all for people making sacrifices to achieve their goals, financial and otherwise. But not eating???!!! Skipping a few meals a day???!! She didn't even say "cut your grocery budget" or "eat ramen". She just flat out said pay down your loans even if it means not eating. That's by far one of the stupidest things that I've ever heard. How will I have the energy to do work if I'm not eating? How can I focus on an empty stomach?

There are plenty more so called "advisers" out who will tell you a whole bunch of non-sense, like retirement is the only thing that you should be focused on, or that maxing out your 401(K) is the best idea in the world. Some of these platitudes are spouted by well-meaning people and some of it might even be good advice. But the advice is not for everyone. What this advice often fails to do is take into account that people want to live, and not just wait until 60 years of age to enjoy their life. Or live a life purely ruled by spreadsheets and numbers.

For instance, if you value being able to spend your time as you choose or be a freelancer or want retire early and see the world, maybe you should get aggressive with your investments and place all of your money into a taxable account instead of retirement accounts . If you value family and want to stay home with your kids while one spouse works, that might be a 'bad' financial decision looking at pure numbers, but it might be an excellent decision in terms of the psychic/emotional benefits that it provides for you, your spouse, and your family. If you don't care about using credit anytime in the near future, but would rather take a lower paying and more fulfilling job, maybe you shouldn't focus on aggressively paying off all of your debt as soon as possible. (*Disclaimer: You should always pay off your credit card debt as soon as possible as the interest rates are so extraordinarily high.)

The moral of the story is that everyone has different priorities. Sometimes those priorities might conflict with conventional financial advice and may seem like they lead to 'bad' financial decisions. However, the whole point of having your finances in order is to be happy. We all hope to make good financial decisions because we want more money, or at least enough money to live, and this will make us happy. So why not just prioritize your version of happiness - which is intensely subjective and personal - instead of making decisions solely based on numbers and listening to pundits/financial advisers who tell us not to eat.

Thanks for reading and stay tuned!

JP $

Interview with Nubian Skin Founder, Ade Hassan

2015-07-21T10:00:00.001-05:00

Hi everyone.

Today I'm so excited to bring you an interview with my colleague and former Duke classmate, Ade Hassan. She is the founder of Nubian Skin, a nude lingerie line for women of color.

Let's jump right in.

Pollard Financial Coaching: First of all Ade, thanks so much for taking the time to answer my questions. I really appreciate it. Tell us a little about yourself. Where are you from? What’s your educational background? Anything that you think would be useful to know about your life before founding Nubian Skin.

Ade Hassan: I was born in the UK, and have grown up in a few different places including Nigeria, England and the U.S. I went to university at Duke, later returning to the UK to complete my masters at SOAS. Prior to Nubian Skin, I was actually working in the finance industry, mainly in private equity. Prior to going full time on NS, it was a tough balancing act. The work I was doing is client-focussed, so the hours are demanding, but when you’re incredibly excited about something, waking up early and going to bed late doesn’t seem like such a chore.

PFC: I think the concept of a lingerie/hosiery brand for women of color is brilliant. How did you come up with the idea? Was it born out of necessity – that is to say, did you want some “nude” lingerie for yourself and couldn’t find any?

AH: Thank you! Nubian Skin was essentially born out of frustration. I wanted a product that I couldn’t find in shops, so I decided to create it. I knew I couldn’t be the only one who felt the same way. I’ve always wanted to be an entrepreneur, and I’ve always wanted my business to be fashion related. I had several ideas in the past and a few that I looked into moving forward with, but ultimately when this idea came into my head, it truly stuck. I realised it was something I needed and was so essential, that it had to be something other women of colour would want. The thing that really gave me the push I needed was receiving a card from my friend which said “It’s time to start living the life you have always imagined,” so I decided to do just that.

PFC: Once you came up with the idea, what was your very next step that you took?

AH: It took me two years from the concept to creating the company, and another year and a half till I actually launched. The first two years were brainstorming and planning.

PFC: How did you come up with the name Nubian Skin?

AH: I wanted something which really spoke to the history and significance of dark skin, so I chose Nubian. I had originally thought of Nubian Nude, but that can be very tricky when it comes to internet searches, ‘Skin’ just worked.

PFC: Where did you come up with the startup capital to begin Nubian Skin? Was it personal savings or did you have investors?

AH: The company was self-funded. All friends and family.

PFC: Do you have a background in fashion? Sewing?

AH: My career prior to Nubian Skin has been very finance focused, although I did take a year break from work several years ago when I took sewing and pattern cutting classes.

PFC: Who created the first prototype of the lingerie that you sell? Did you put it together yourself?

AH: The designs are quite basic, so design-wise it’s not too complicated. I had a very clear idea of what I wanted, so I worked directly with the manufacturer to create the design, colours and look that I wanted.

PFC: You’re very young to be the CEO of a company that has an international footprint/presence. Did you face any hurdles in terms of getting your product in stores being so young?

AH: I haven’t faced issues being young, but more with being a young company. The biggest hurdle to overcome at the start was finding a good quality manufacturer, and as a new and small business, a lot of manufacturers simply didn’t respond to queries, and others were looking for incredibly high volumes, so it was tricky.

PFC: Did you or do you have any mentors who helped point you in the right direction when you were just starting out? If so, how often do you speak to them?

AH: My parents are both entrepreneurs and they have such a wealth of experience. I speak to them almost every day. Getting good advice is incredibly important especially if you're new to an industry, so I found a great consultant at the start, and continue to consult with her regularly.

PFC: What’s a typical workday like for you? In the beginning stages of forming a company, is there any work-life balance or is it all

AH: There is no typical day. Usually as soon as I wake up I look through emails on my phone. Then I’ll check Twitter, Instagram and Facebook to see what people have said - it’s a great way to get direct feedback from customers or potential customers.

After that, I head to the office to really get started. I'll have different priorities each day, whether that’s meetings, changing something on the website, logistics, finance, coming up with new ideas, visiting a manufacturer or helping to process different orders.

PFC: What role does social media play in your company?

AH: Social media has been amazing for us, and it's how we got the word out. It really allows us to get a feel for our customers, what they want and what they love. It also gives Nubian Skin the chance to showcase its personality, communicate and gather feedback which is incredibly valuable.

PFC: What do you consider your biggest achievement in the company? What’s the biggest mistake you’ve ever made within the company?

AH: I’d say that the biggest achievement getting this out there, and to have major retailer pick it up shows how important it is to cater to under-served customers. I haven't made any detrimental mistakes, and hopefully I won't. I learn so much each day.

PFC: What CEO or person in general inspires you to do what you do?

AH: My family. They are wonderful. My mother is an incredible woman, and my father cannot do enough for his family. They are both entrepreneurs, and they’ve set a great example for me.

PFC: When you were in college, did you ever think that you would be spearheading an international lingerie company?

AH: I always wanted to be an entrepreneur. Lingerie was never a thought though.

PFC: What are three major things that you’ve learned as a result of running your own business?

AH: 1) I can handle a lot more stress than I thought.

2) It is incredibly important to have a great support base.

3) You have to be grateful.

PFC: What advice would you give to those who are interested in starting their own company?

AH: Firstly, it’s really important to research your idea to make sure that whatever it is, it’s valid. Make sure you really believe in the idea especially if you’re working in another job. If you’re up at 2 am or 4 am working on this, then you want to believe in it. You also need to be willing to work really hard. Everybody who is going to start something anticipates that it’s going to be difficult, and that it’s going to be hard, but it will be so much more difficult and so much harder than you can prepare yourself for. And also – have faith in yourself. If you don’t believe in yourself, then who will?

PFC: What are the downsides of being an entrepreneur? The perks?

AH: One downside is the element of risk! The biggest perk is that you’re working on something you love!

PFC: Why’d you decide to headquarter the company in England as opposed to the United States? How big is the market for lingerie for women of color in England and Europe?

AH: I decided to headquarter in London because this is where I live. The market for lingerie for women of colour is big here, but the US is definitely key.

PFC: Are you looking to eventually open up stores in the United States?

AH: We'll have to see how it goes, but it would be amazing.

PFC: Your collection was recently picked up by Nordstrom’s in America and was made available in stores in Portugal. What was the process of forging those business relationships like?

AH: It takes a lot of perseverance, particularly when you’re a new company!

Tradeshows have been good for us because it's a chance to meet all sorts of buyers.

PFC: Your four signature colors are “Berry”, “Cinnamon”, “Caramel”, and “Café Au Lait”. Do you have plans to come out with any other hues? Can you look at a woman and automatically tell what “flavor” would best suit her?

AH:We don’t currently have any plans to come out with any hues – although we would look into it if the demand was there, but for now these four colours work really well. I do tend to have a good idea of which “flavor” would suit each woman best – after all I did spend a year coming up with the colours!

PFC: Thanks so much again, Ade, and best of luck to you and your company!

In Order to Be Successful, We Must Be Decisive and Singularly Focused

2015-07-20T15:13:00.001-05:00

Hey everyone.

Today's topic is about two articles I read a few months back that had a major impact on me. The first was an article from Business Insider about how rich people are decisive. By "decisive", the author of the article was referring to the fact that people who obtained or created massive amounts of wealth were able to quickly and confidently come to decisions, and changed those decisions very slowly if and when they needed to.

The second article was about how you need to focus on one thing in order to be successful.

Why did these articles have such an impact on me? Well, I'll tell you that sometimes I have had trouble making decisions. Not decisions about what to eat or what to wear or what to do with my weekends. I actually make those decisions fairly quickly and easily. In fact, I've never understood why someone would have trouble making those sorts of decisions. I mean, those types of decisions are so inconsequential. The decisions I have had trouble making as of late have pertained to my professional life.

You see, I have a lot of ideas that pop into my head about how to make money. In fact, ever since college, I've been trying out various ideas about how to make money quickly - or at least more quickly than just through hard labor. I've tried investing in the stock market, playing poker, and playing fantasy sports. I've also thought about turning my law firm into a law firm that focuses exclusively on medical marijuana given that New York State has recently passed medical marijuana legislation and given that there are no law firms that focus exclusively on medical marijuana in New York State.

The truth of the matter though is that there are a lot of ideas out there in the ether that can make one a pile of money. However, if we are indecisive and try to execute on all of the ideas that we have in our head at once, then we will undoubtedly fail. The reason for this is that it's virtually impossible to achieve any level of excellence within a field while trying to be excellent in another area also.

What's more - and I know this from personal experience - all of this wavering back and forth about what route to take will leave you feeling absolutely exhausted and unmotivated! And it's really hard to be successful when you're not particularly motivated.

So what's the moral of the story? Even if you're not an entrepreneur, if you you want to be successful, you have to make a decision about what exactly it is that you want and focus on one particular method of achieving. And if you're having a tough time trying to figure out what route you want to take or what you want to focus on, here are 3 actionable pointers to help you make the best choice.

1) Figure out what your priorities are in life. What do you value most? What is the most important thing to you? Is it family? Is it money?

2) Choose the route that you believe in the most. That is to say, choose whatever choice you care about the most or aligns most closely with your values. If you listen to your heart, you know what route this is.

3) Realize that if you make a decision, and it turns out to not be working for you, you can usually change it. Very few decisions are absolutely immutable.

Fortunately, all of the pointers above are simple in theory and simple to execute. Lastly, guys and girls, be sure to check out my Facebook page where I give out free finance tips of the day, along with my YouTube channnel where I break down complex financial concepts.

Stay tuned!

JP $

The Daily Dollar: The Power of Dividends

2014-10-30T23:28:00.001-05:00

The Daily Dollar: Don't Be Too Risk Averse and Don't Max Out Your 401(k)

2014-10-30T23:27:00.001-05:00

The Daily Dollar: The 6 Pillars of Financial Independence

2014-10-30T23:25:00.001-05:00

The Daily Dollar: Building Assets When You Have Debt

2014-10-30T23:21:00.003-05:00

The Daily Dollar: Money and Emotions

2014-10-30T23:20:00.002-05:00

The Daily Dollar: Letting Go and Learning From Your Financial Past

2014-10-30T23:18:00.003-05:00

Reality Finance/Millionaire Challenge and Everything You Need to Know About Finance in a Few Blog Posts, Part 2

2014-10-18T16:33:00.001-05:00

Hey everyone.
As promised in my last post, today, we will talk about how specifically the government creates money and how it directly and indirectly controls where that newly created money flows. (This concept is called monetary policy.) But in keeping with my reality finance/millionaire challenge theme, I'd like to let everyone know where I stand financially as of today.

In the past three or four days, I've made $2,000.00. After paying my personal bills, paying my law firm's bills, and contributing to my retirement and savings accounts, as it stands now, my liquid net worth is $1,986.84. However, only $1,680.84 of that money will not be touched. The remaining $306 will be used for regular living expenses and tiding me over until the next time I will receive money, which will be on this Monday, October 20, 2014.

My credit score just got bumped up to a semi-respectable 645 and my outstanding credit card balance is currently $813. In another post, I'll explain to you why you shouldn't be so concerned with your credit score, as opposed to being concerned with acquiring liquid assets. But I did want to give you all those pieces of information so you can see exactly where I stand with regard to my finances. Now, time for today's finance lesson.

Who controls money and how is it done?

In my last post, I talked about how nowadays, virtually every economy in the world operates on a fiat currency system. Because of this system, and the fact that money is essentially not backed by any physical commodity, an endless amount of money can be created.

Paper money is printed and metal coins are minted by the United States Department of Treasury. The Department of Treasury works hand in hand with the Federal Reserve to make sure that the economy stays healthy, that people are buying enough goods and services, that the amount of goods and services that a person could purchase last year is not too different from what that same person can purchase with the same amount of money this year.

The Federal Reserve (or "Fed" as you might hear it called on t.v.) was created in 1913, and was created in order to among other things, gather information on what is going on in the economy and how to make it stable. The Fed is not apart of any of the three branches of government, but it is subject to oversight by Congress.The Fed has twelve branches around the country - mostly in major cities like New York, San Francisco, and Boston, for instance - and these branches are the foot soldiers of the Fed. The Fed, which is often referred to as the banker's bank, through its twelve branches, lends to private banks. These private banks which receive funds from the Fed are what allow for the United States economy to run smoothly.

The gross domestic product of the United States is $13 trillion. In order to arrive at an economy so large, and because we no longer live in a system whereby money is backed by a physical commodity or service, some merchant had to have someone put trust in her that if the merchant were lent money, value would be created and the money lent out would be paid back with interest. Hence, the saying that our entire economy is one based on credit. And that is certainly true. Most Western governments, unfortunately, are operating largely on credit.

The United States, because it is the most powerful, stable and wealthiest nation in the world, can print money and have everyone around the world believe that that money is worth something. The United States can also ask for a line of credit, by issuing treasuries to people, corporations, or even other countries, and can always get that line of credit because it is so wealthy and stable.

The branch of the of the Fed that is responsible for making sure that the economy is stable, and making adjustments if the economy is not - the Federal Open Market Committee - meets periodically throughout the year. When it meets, it takes a look at whether unemployment is high, whether inflation is high, and then makes a decision as to whether more money should be put into the economy. If the determination by the FOMC is that more money should be put into the economy - i.e. for instance, if private banks are not giving out credit easily, or if corporations are not hiring - the Fed can print more money, or buy Treasury bonds. In fact, this is what has been happening lately.

The Fed currently wants to jump start the economy, but does not want to devalue American currency and create inflation (which would happen if more money were printed). So it has decided to make the interest rate at which it lends to commercial banks low and to buy back a lot of the debt it has issued, making the economy flush with cash. This is known as quantitative easing.

In my next post, I'll talk about interest rates and how exactly this affects your credit card payment, mortgage rate, student loans, and even the bond and stock markets. Stay tuned and until then, I hope you continue to live richly.

Reality Finance/Millionaire Challenge and Everything You Need to Know about Finance in a Few Blog Posts, Part 1

2014-10-18T14:19:00.000-05:00

Hey everyone.

Today's post is intended to give you all a bird's eye view and general understanding of how the global economy and financial markets work. But before I get into that, I just wanted to let you know where my finances stand, as part of the "Reality Finance/Millionaire Challenge".

I generally try to save about 10% of everything that I earn, before taxes. However, it doesn't always work out that way. Sometimes I save less and sometimes I even save more. My savings rate is also affected by upcoming bills that I know I must pay. For instance, if I know that my rent is paid for the month and all of my automatic debits have come out of my checking account, then I can save more than if I know I have a large student loan payment coming out of my account automatically, or I know that I still have to pay the remaining half of that month's rent.

As a solo practitioner lawyer, my income doesn't always come at the same time each month, but it is fairly consistent. I generally earn anywhere between $4,000 to $5,000 per month and this month, I forecast that I will earn approximately $6,000 given my talks with clients who want to retain me and other attorneys who have expressed to me that they need my assistance in various drafting projects.

Yesterday, I made $275, and being that I didn't have any bills coming due immediately, I was able to transfer $40 of it to my Roth Individual Retirement Account, $35 of it to my regular investment account, and I put $110 of it into my savings account. The stock market kind of got slammed today, and so the two stocks that I currently own - Baidu.com and Lockheed Martin - got hit. Not as badly as the broader stock market though. So in total, I lost $14.84, leaving my Roth IRA balance at $1,296.33, and my regular investment account balance at $206.29, for a total investment account balance of $1,502.62. My savings account balance currently stands at $110.

Now that I've gotten that out of the way, it's time to begin to learn everything you need to know about finance. So here we go.

The topics of personal finance and finance generally are all about money. So what exactly is money?

The Definition of Money

Money is just a medium of exchange. A long time ago, humans used to trade whatever they had in order to get what they needed. For instance, apple farmers used to go to pig farmers to get ham, and the pig farmers would get apples from the apple farmers. This is known as a barter system.

At some point , people decided that always carrying around goods to trade or having to accept illiquid services was inconvenient. So humans came up with the idea that since everyone can agree that gold is pretty, malleable in form, and hard to duplicate, that's what should be used. The gold standard was used for some period of time, but then governments decided to move to a fiat currency system, whereby money is not tied to a physical commodity like gold. A fiat currency system is what every major developed economy uses today.

What are the benefits of having a currency system that is not tied to a physical commodity? Well, if the amount of money that is in circulation is not connected to a physical commodity, then - you guessed it - money can be created out of thin air. And that's exactly what the government does and is doing as we speak.

In the next blog post, I'll talk about exactly what entity is in charge of monitoring the amount of money in circulation and how it affects you and me on a daily basis.

Stacking Chips, Tens and Hundreds of Dollars at a Time

2014-09-24T22:54:00.001-05:00

Hey everyone.
So in the past two days, I made $600 from legal work and the way that I allocated that money was as follows: $100 towards my credit card bill (I now have a balance of $961), $100 toward my 2013 tax bill (I now have a balance remaining of $1,100), $110 towards my professional liability insurance bill, $50 towards my Roth IRA, $25 towards my regular investment account, $40 towards tithes, leaving me with $75 in checking until the next time I receive money. Which will be tomorrow.

Currently, I make about $150 a day, 7 days a week, 365 days a year. I aspire to make $300 a day next year, which will put me in the six figure income bracket. $300 a day translates into $109,500 a year. Having more income means that you can save more. I advocate saving anywhere from 7 - 15% of your income, even when you have credit card debt. However this is only provided that your credit card debt is $1,000 or less. When your credit card debt starts to creep above $1,000, that's when credit card interest really starts to burn a hole in your pocket.

I do agree with financial talking heads that one should pay off credit card debt as aggressively as possible. However, I believe that there is a place for saving, no matter how small your income is, if you have credit card debt at $1,000 or below. I believe that if you have credit card debt above $1,000, you should use 90% of your money allocation for savings/investing to pay it down and just save 10% of the amount you would normally have saved. (Example: You have $5,000.00 in credit card debt. You were originally planning to save $250 per month. Instead of saving that entire $250, use $225 of it to pay down your credit card debt and allocate $25 towards your savings.)

The reason that you are not using the entire $250 to pay down your credit card debt is because having some reserve makes it less likely that you will have to rely on your credit card to fund future purchases. And for me, I feel much richer when I can look at my bank statement and see money in my account/see that I'm a member of the investor class, as opposed to calling a loan company representative and hearing how much debt I've paid off.

As I've mentioned in my previous post, my most immediate goal is $10,000 in savings/investments by the end of the year. After getting $1,000 in savings/investments, the next major milestone, in monetary terms is $10,000. The reason for that is primarily psychological for me, but I also feel as if $10,000 allows one the ability to make a significant investment in an individual stock or several stocks. By significant, I mean that the amount of capital you invest in a stock can generate a nice bit of money if the investment doubles. (If you buy 2 shares of a $200 stock, and it doubles, you've made $400. But if you buy 200 shares of a $200 stock, and it doubles, you've made $40,000.)

When making purchases for my own stock portfolio, I usually buy in amounts of $500. That is to say, I usually invest $500 at a time. Although it's not a lot, I believe that waiting until I have $500 to invest forces me to take time to evaluate the merits of each investment I purchase. Speaking of investments, as of today, my investment account stands at $1,341.41, with $1,210.12 of that being in my Roth IRA and the remaining $131.29 in my regular investment account. I made $14.36 today in my 2 shares of BIDU and $6.15 in my 3 shares of LMT for a total of $20.51. My portfolio is down .3% and I started my portfolio at the beginning of September.

At any rate, I think that's more than enough for a post. I hope to see everyone again soon and thanks for reading.

Opening Up My Financial Life

2014-09-22T23:43:00.000-05:00

Hey everyone.

So as I promised in my last post, I'll be disclosing my own personal financial state, in my quest to become a millionaire. But before I do so, I'd like to say that while I don't endorse everything that Suze Orman says on her t.v. show or in her books, she once said that she believes the three impediments to achieving wealth are fear, anger, and shame. I wholeheartedly agree.

There were times in my life when I was fearful about when I would make money, or whether I would make money, or generally around the topic of money. There have been times when I have been angry at how little money I had, while jealous at the amount other people have had. And I have definitely been embarrassed about my financial state at various times in my life. However, I have managed to resolve my money anxieties and I realize that I am always able to generate income if and when necessary. I have also managed to resolve my anger around not having the same amount of money as some of my peers. And through opening my financial life up to the public, I hope to resolve my issues regarding shame and money.

Money in general, and debt specifically is such a taboo topic. I am a 31 year old male and I have a total of $90,000.00 of federal and private student loans from my undergraduate education at Duke University. I also have another $122,000.00 in federal and private loans from law school. I owe my mom $5,000.00 for a loan she gave me after I passed the bar exam and I have $1,069.00 in credit card debt. The credit card debt has been mostly from paying monthly healthcare premiums and for a $500.00 plane ticket I had to buy unexpectedly for my grandfather's funeral. So my total debt is $218,069.00.

As of today, September 23, 2014, I have a total of $1,253.99 in my investment account, $1,147.70 of which is in my Roth IRA. I currently own 2 shares of Baidu.com (BIDU) and 3 shares of Lockheed Martin (LMT). Although most financial planning experts advise paying off credit card debt - which I am doing aggressively - I feel a certain sense of security and financial well-being when I know that I am making my money generate money for me. My investments have acted as a kind of make shift savings for me also over the past few working years.

The most money I've ever had in my savings/investment account is $15,000.00 and I had that amount right after Duke. I saved and invested while living at home and working while paying no rent. Over the past decade, I have saved and invested several 4 and 5 figure sums. However, life and more specifically paying for education expenses over the past few years, rent and groceries in New York City, along with sporadic employment prior to late 2012, has dwindled my safety net.

Fortunately, I am beginning to rebuild my savings and investment portfolio and I recently moved into a spacious new one bedroom in Manhattan. My rent is currently $1,100 per month; my professional liability insurance is $90.00 per month; my phone and internet service costs $250.00 per month; my office rent is $500.00 per month (but it's sometimes abated); my health insurance is $354.00 per month; my disability insurance is $180.00 per month; my life insurance is $107 per month; and my student loan payments that I am currently making total $1,000.00 per month. I'm on track to make $55,000.00 this year as a solo practitioner lawyer and on my quest to be a millionaire by December 31, 2016, I am aiming to have $10,000.00 in liquid assets by December 31, 2014. The road to major goals is paved with smaller, more attainable ones to promote perseverance.

Aside from ridding myself of shame surrounding my financial situation, I want to chronicle my journey toward millionaire status and show people that anyone with a sufficient income ($45,000.00 in major cities and $40,000 in smaller towns) can become rich - myself included. As I journal about my own personal journey, I'll be sure to include money/personal finance/investing lessons, as they pertain to my personal situation. Lastly, please send in any questions or comments about any personal finance topic you'd like to see me discuss. Thanks for reading and good night!

Reality Finance - The Millionaire Challenge

2014-09-18T23:43:00.000-05:00

Hey everyone.
I read an article today that talked about Federal Reserve Chairwoman Janet Yellen and her insight that the poorest of Americans have not benefited from the economic recovery that has taken place over the past five years. I've always believed that anyone can learn to manage their money well and become a millionaire - myself included. But sometimes it's harder for those who 1) aren't earning enough; 2) don't understand what to do with their savings, if they are able to save; or most importantly 3) haven't seen anyone close to them become wealthy independently. I would like to remedy the problems I just mentioned. That's where my Reality Finance - Millionaire Challenge comes in.

You see, I WILL BE A MILLIONAIRE BY DECEMBER 31, 2016. More specifically, I will have paid off all of my debt and have $1,000,000.00 in cold hard cash in my bank/investment account by December 31, 2016. But in the process of becoming a millionaire, I would like to expose to the world how I do it. That's the "reality" part of Reality Finance. I want to show people that with perseverance and hard work, it is possible to achieve financial independence. I also want to help specifically groups that have been ignored by the financial/wealth management industry such as younger people (ages 6 - 30), women, and people of color. I remember interviewing with a wealth management company some time ago and the interviewer telling me that I couldn't make money working with a person who did not have a lot of money. That concept really rubbed me the wrong way - mainly because it's not true!

At any rate, I've decided to open up my finances for the world to see. I will disclose my debt load, my investment account balance, how much I save and spend on various things throughout the day, how I choose investments, and any other thing readers/viewers would like to know. Tomorrow and in the coming days, I'll be opening up about these pieces of information about myself. I'll be doing this in an effort not only to chronicle my own journey toward $1,000,000.00, but to show the entire world that anyone with drive and an income can become wealthy, no matter what their financial starting point is.

The World's Best Investment Is an Investment in One's Self

2014-06-24T03:05:00.002-05:00

For the longest time, I've had an interest in the stock market. The whole concept of making money from just using my brain turned me on. And don't get me wrong - being invested in the stock market over the long term is an excellent idea. A dollar invested in the S&P 500 Index (a group of companies that are generally thought to be a bellwether for the United States economy) in 1970 is now worth $77.79. For a shorter time frame example, imagine buying an index fund in 1994 - twenty years ago. If you invested $10,000 in that index fund, today you would have $106,960.86, for a compounded annual growth rate of 12.98%!

All of the above goes to show that the stock market can be a fabulous investment. However, I do not believe that the stock market is the best investment.

After learning so much about personal finance and travelling along my own journey to being at peace with money, I've realized that the world's best investment is an investment in one's self. An investment in one's self can be obtaining higher education, getting coaching, getting training, doing something enjoyable that relieves stress, building one's self esteem or one's business.

The primary reason that I believe that an investment in one's self beats investing in the stock market every time is that the returns from the stock market, over the long-term, are capped at around 20% per year. That is an astounding compounded annual growth rate, but it's not one that the majority investors can achieve. In fact, the only investor who has achieved such a feat by investing in companies/stocks over a 40 year period is Warren Buffett. So unfortunately, it's unlikely that we can achieve the same sort of rate of return. When we invest in ourselves though, the potential return is unlimited.

Investing in ourselves allows us to get and maintain a job, which allows us to save money to even put to work in the stock market or other prudent risk taking endeavors. Without employability or marketable skills, there is no ability to build wealth. Also, Warren Buffett is famous for saying that in all risk taking endeavors, one should stay within one's circle of competence. That is to say that if you are most interested in fashion or the culinary arts, then you should devote all of your time and energy to becoming the best couturier or chef/restaurateur, and not to picking stocks. You can have a professional do that for you.

When you invest in yourself, you increase your human capital and financial capital to invest in things outside of yourself!

How to Save for Your Child's Education - 529 Plans vs. Coverdell ESAs

2012-09-15T13:08:00.002-05:00

Hello everyone.
I'm sure a lot of us are acutely aware of the growing student loan debt crisis in this country. According to the Wall Street Journal, student loan debt topped $1 trillion last year. Such being the case, not only is it much more important nowadays that students make wise choices about where to attend college, but it's also more important that parents do as much they can to give their children a leg up financially by saving for the child's educational expenses when she (the child) is young.

According to the College Board, the average cost of tuition and fees in 2011 for a private college was $28,500, and this doesn't even include room and board. At private universities like my alma mater, Duke University, the total cost of the college experience is $56,056 per year! But don't let this number scare you. When it comes to saving for college, there are a number of options that you have available to you.

529 SAVINGS PLAN - PREPAID TUITION PROGRAM

A 529 Savings Plan comes in 2 flavors - the prepaid tuition program and the college savings plan. A 529 plan is an investment vehicle, akin to a Roth or traditional IRA, which allows you to set aside funds to invest, and which are never taxed, in order to pay for a beneficiary's (student's) college expenses. Once a 529 Plan is opened, it is managed (the assets within it are invested) by a trustee. Depending on who you open the plan with, you can sometimes also choose how the money is invested. And fortunately, its existence does not affect the beneficiary's (student's) eligibility for financial aid. Moreover, contributions to a prepaid tuition program decrease a donor's state income tax liability.

The prepaid tuition program allows the people who contribute to the student's 529 plan to lock in tuition rates where they are right now, regardless of how much higher they are at a later date, at a predetermined university/college or from a list of predetermined colleges. With a prepaid tuition plan, you can prepay all of a child's tuition if you happen to come into a windfall. However, because prepaid tuition programs vary from state to state, availability of prepaid tuition 529s might be limited to residents of the state where the college is located.

Lastly, if the beneficiary of the prepaid tuition program 529 was to die, the amount in the plan can be transferred to any of the following qualifying relatives: spouse, child (includes foster and stepchildren), father, mother, brother, sister (includes all step-siblings), and a first cousin.

529 SAVINGS PLAN - COLLEGE SAVINGS PLAN

The college savings plan version of the 529 Savings Plan is very similar to the prepaid tuition version, but it is infinitely more flexible. It has all of the perks of the prepaid tuition program such as transferability and tax deductibility, but you can use it for any university. Also, you are not locking in tuition prices with this plan. You are just saving/contributing a specific amount of money that is to be invested and will cover the beneficiary's qualified educational expenses. The lifetime contribution limits in each state tend to rise with the cost of college, so many states have current contribution limits upwards of $300,000.

It should be noted however that the government does not permit you to use the assets in the plan for anything besides educational expenses, so it is important not to overfund this type of plan. And be sure to coordinate with grandparents and relatives who may want to contribute to the plan. Doing so prevents overfunding of the plan.

Lastly, this type of plan, as I mentioned before, is the most flexible plan. You should use it if you want your child to be able to choose his own college and want the ability to allow the child to use the funds when she desires. There is no age or time limit by which the beneficiary must use the assets in the plan. Unfortunately, the prepaid tuition program does have certain age limit and time for use restrictions and these vary by state.

Here's a quick summary of the major differences between the two types of 529 Plans before we jump to Coverdell Educational Savings Accounts.

COVERDELL EDUCATIONAL SAVINGS ACCOUNTS

Coverdell ESAs are also tax free educational saving investment vehicles. However, in contrast to 529 Plans, Coverdell ESAs can be used to fund elementary and secondary school expenses if you would like to send your children to expensive private schools when they are young.

These types of plans, in my opinion, should rarely if ever be used though because even though the maximum contribution to the account was $2,000 per year per child for the past ten years, it is scheduled to be reduced to $500 per year per child at the end of this year. Moreover, Coverdell ESAs require that the balance in the plan be used for educational expenses by the beneficiary's 30th birthday, or else the plan will be hit with taxes and penalties. As you can see, a 529 Plan is way more preferable than using a Coverdell ESA. And if you want to save money for your child's K through 12 school expenses, you'd be better off investing as much as you possibly can in an individual investment account and bearing the tax burden rather than being hamstrung by a $500 maximum contribution limit per year per child.

I hope this post was informative. If you'd like to begin planning for your child's future, you can do so by clicking here or here. Until next time...

The Six Pillars of Financial Independence

2012-09-09T22:05:00.000-05:00

Hey everyone.
In my last post, I spoke about limiting beliefs and how they restrict us, especially when it comes to money. Removal of limiting beliefs is actually one of the pillars of financial independence I have developed, but I will discuss all six today. Let's get started.

In order to achieve financial independence, which means being able to live without financial worries, debt, or wondering about the stability of your income source, you must abide by these six precepts. They follow an order and the higher up on the list a pillar is, the more important it is. They are as follows:

1) Accepting responsibility for your financial situation.

2) Acknowledging and removing limiting beliefs regarding money from your life.

3) Identification of goals for your money.

4) Saving.

5) Investing.

6) Patience.

ACCEPTING RESPONSIBILITY FOR YOUR FINANCIAL SITUATION
Look, all of us make mistakes. Some of us have made more than others, but no one gets off the spinning dirt ball without making mistakes. This includes financial ones. Financial mistakes include taking on too much student loan debt, using credit cards to buy stuff we don't need, not paying attention to our credit score and making late payments when paying bills, and the list goes on and on.

As we get older and wiser, hopefully we stop making these mistakes. But it's easy to look back on your life and beat yourself up about how much money you wasted making imprudent financial decisions. Forgive yourself and move forward. Forgiving yourself doesn't mean you are letting yourself off the hook for your poor financial decisions. In fact, it's quite the opposite - it means that you are aware that YOU are the only one who made you make those financial decisions in the past.

Until you accept that you are in control of your decisions, and not someone else or some outside force, you will never be in control of your money.

ACKNOWLEDGEMENT AND REMOVAL OF LIMITING BELIEFS
Check out my last post on limiting beliefs regarding money. It provides insight on what a limiting belief is and what you can do to get rid of it.

IDENTIFICATION OF GOALS FOR YOUR MONEY
Money should be a 'means' in your life, and not an 'end' in itself. A lot of people want to amass money so they can see it sit in a bank account, as if that would bring them tremendous joy. The thought of having enough money to do whatever is necessary might be comforting, but eventually you would use that money in that bank account to enjoy yourself along with family and friends. Working toward a goal is that much more fun when you know specifically what your goal is.

Do you want to travel the world and stay in five star hotels the whole way? Do you want to open a bakery and paint on the side? Money can help you do all of these things, but when you know what you are working for, making tough decisions becomes easier for you than if you have an amorphous goal of 'having a lot of money'.

SAVING
Trying to achieve financial independence without saving is like trying to cook without ingredients - you can't do it! Saving money allows you to have capital that can work for you, even when you are not working. I know that it takes discipline, but you have to ask yourself if that new iPad or having cable tv is more important to you than achieving your dream some day.

INVESTING
Investing allows your money to make money for you. Just look at the fact that even in these economic times, the U.S. has a record number of millionaires. Why? Because the rich don't get most of their income from their paychecks - they get it from investing in assets. There are lots of posts on this blog about getting started with investing (particularly in stocks). I recommend that you check them out.

PATIENCE
In most aspects of life, patience is a virtue. It is no different with regard to becoming wealthy. Patience will keep a saver from getting frustrated and abandoning her savings plan. It will keep an investor from trading too much in his account because he thinks he can 'time' the market. Most importantly, it will allow investors to take advantage of the power of compound interest and tax-deferral if s/he is using a Roth IRA, traditional IRA, or 401(k).

It takes time to implement all of these pillars into your life. But if you make a commitment to do so, bit by bit, your financial 'house' will be in order. Until next time...

Money and Limiting Beliefs

2012-09-08T14:14:00.002-05:00

"Whether you think that you can, or that you can't, you are usually right." - H. Ford
Hey everyone.
Today's topic is limiting beliefs and how they restrict us, especially when it comes to money. Let's jump in.

So, what exactly is a limiting belief? I think that we have to begin by defining a belief. A belief is defined as an acceptance that a statement is true or that something exists. Another definition is something that one accepts as true or real or a firmly held opinion or conviction. However, not all beliefs are true. If a belief can be an opinion or conviction, then of course all beliefs are not true!

For the longest time, people believed that the earth, instead of the Sun was the center of the universe. Then, a brilliant mathematician and astronomer came along and shattered people's beliefs in 'geocentrism' and replaced it with 'heliocentrism'. And for the longest time, people believed that no one could ever run a mile in under four minutes, but then came Roger Bannister who ran a mile in under four minutes in 1954! And even after that, Bannister's record has been broken over and over again.

The point is that a lot of times, humankind believes things and these things turn out to not be true. And there are myriad reasons for these beliefs - sometimes our minds cannot comprehend things being different than they appear to be. I mean, before we as humans landed on the moon, it was pretty crazy to think that we could be on the moon! But we did it. Which leads me to my next point. A lot of times, we (myself included) look at life as it is at the moment and not how it could be, even though we wish life could be different or better. Such is what a limiting belief is - a negative belief about things as they are, and not a positive one about how they could be.

Limiting beliefs do not serve us as humankind very well. Can you imagine if Barack Obama just moped along with everyone else and said "there's no way a Black man can ever get elected President"? If he had 'believed' that statement, then he would have never taken action and run for President. And if you don't run, then how can you win?

Limiting beliefs show up a lot in our lives. Some of us believe that we are unattractive, unintelligent, unlucky, or whatever. And even though not all of us believe the things in the sentence above, a lot of us who were not born into money believe that money is hard to come by or that we will struggle for the rest of our lives or that we just can't get a break. This system of beliefs that I just described is known as a 'poverty consciousness', as opposed to a 'wealth consciousness'. And, believe it or not (and I hope that you will believe it), the more that we think and feel these things, the more they become a part of our identity and we will continuously see the manifestation of that belief in our life.

Let's be real. Our thoughts are usually on overdrive. We let things play over and over again in our heads and sometimes we feel as if we have no control over them. The subconscious mind is essentially our slave and whatever we tell it to believe, that's what it will believe. Which is why it's so important to never, even in a tough economy, let words of discouragement and despair, be the predominant thoughts in your head. Stop listening to news about high unemployment or complaining about how you're having a tough time making ends meet. What you might be saying or thinking probably is very much a reality in your life. It does not matter what problems you are having (and we all have them) in you life though. Start repeating and thinking to yourself the things that you would like to see in your life. The more you think something or say it, the more you will believe it. And when you believe something, you will take definite action to make that belief become a reality. Here are a few statements that are positive affirmations about money that you should try on and see how you feel about them:

1) Money comes easily to me.

2) I have more than enough and am at peace with my finances.

3) I am a truly rich wo/man.

For even greater impact, try stating/thinking these affirmations when in a heightened state such as eating good food, listening to music you enjoy, or even orgasming. When you attach a positive emotion to these thoughts, your energy is heightened and the message sent out into the ether is that more powerful.

To wrap it up, no matter what your financial circumstances, you can make things better for yourself. However, you must begin speaking and believing the things that you would like to exist. When you believe that deserve money, you will make better financial decisions. When you believe that you have more than enough, you can donate to charity, which makes room for more money to flow into your life. I recognize that not everyone wants to be rich, but I'm sure everyone wants to be at peace with their finances and live comfortably. Such is possible by being aware of and ridding ourselves of limiting beliefs regarding money.

The Proper Way to Invest Within a Roth IRA, Traditional IRA, and a 401(K) - Part 2

2012-09-05T10:33:00.001-05:00

Hello everyone.
In the first part of this two part blog post, we spoke about the most tax-efficient way to invest using your Roth IRA. Essentially, my advice was to load up on dividend paying stocks. Today, we'll discuss the most efficient ways to invest using your traditional IRA, if you have one, or your 401(K). Let's get started.

Traditional IRA
Because a traditional IRA allows for tax deferred growth of your money, you should invest as aggressively as possible within this vehicle. As I mentioned in previous posts, the money in your traditional IRA will be taxed at the income tax bracket that you are in at 59.5 yrs. old or whenever you decide to withdraw it, instead of the long-term capital gains rate of 15% (Note that mandatory withdrawals must be taken at age 70.5). The majority of people go into higher tax brackets as they age, assuming of course that their incomes go up as they progress in their careers. The point of investing aggressively though is to achieve the maximum possible gain and offset the tax bite that the investor will feel when she withdraws her money for retirement. The top marginal tax rate of 35% is 2.33 times higher than the regular long-term capital gains tax rate, so the investor should want to make sure that being taxed at a higher rate does not diminish her purchasing power later on in life. The best way to do this is load up on small-cap and mid-cap growth stocks and mutual funds.

If you are looking for a place to begin with choosing these types of stocks so that you achieve gains that are potentially multiples of what you initially invested, I recommend the following newsletters:

1) Motley Fool's Hidden Gems

2) Thestreet.com's Breakout Stocks

3) Cabot's China & Emerging Markets Report

All of the newsletters above have great track records and are available for reasonable prices on a yearly basis. Moreover, not to sound like an advertisement for them, but one great investment pick from one of these newsletters will more than pay for the price of subscription multiple times over!

401(K)
Investing within your 401(K) plan is relatively simple - not because investing is simple, certainly not. But because the investing options within 401(K) plans usually stink! And that is one of the reasons that
I advocate only placing enough money in your 401(K) plan to get the company match and then choosing another investment vehicle for your excess money.

Within 401(K) plans, you mostly only have the options of investing in your company's stock (if it's publicly traded) and various mutual funds. In order to invest in mutual funds effectively, it's useful to go to people whose job it is to evaluate their track records on a daily basis. The preeminent source for mutual fund rating is a company called Morningstar and with premium membership to it, you will find TONS of information on every possible mutual fund in your 401(K) plan and Morningstar's analysts will even rank the funds for you! At $189 a year, I think that's a great value. Especially if you don't have the time or the inclination to research your own investment choices.

When looking for highly rated mutual funds on Morningstar's site, I recommend loading up on small- to mid-cap growth/value stocks if you are in your late 20s to late 30s. Because people in these age groups have time to withstand the inevitable cycles of the stock market, they should be about 50 - 65% invested in growth mutual funds and less focused on income. As you get older though, you should shift your 401(K) balance more toward income than growth. You do not have time to sit idly by and withstand the ups and downs of the market when you want to leave the work force in a year or four! A good resource for determining a good asset allocation mix for your 401(K) plan without consulting a financial advisor can be found here.

I hope this was informative. Feel free to email me at jonathan@pollardfinancialcoaching.com with any questions or suggestions you have for blog posts! Take care and until next time...

The Proper Way to Invest Within a Roth IRA, Traditional IRA, and a 401(K) Plan - Part 1

2012-08-30T15:49:00.002-05:00

Hey everybody.
My last two posts were about the differences between a Roth IRA, a traditional IRA, and a 401(K) plan. Today, we're going to talk about how to invest the most effectively within each of those investment vehicles. By effectively, I mean in order to achieve the maximum tax advantage since all of these investment vehicles are in fact tax savings vehicles. Let's begin.

ROTH IRA
As I mentioned in the second to last post, the Roth is the most flexible of the three. And when you withdraw your money from a Roth IRA at 59.5, you will not be taxed on any of the gains. The reason that you will not be taxed is because the dollars that you are putting into the Roth IRA are after-tax dollars. That is to say, they have already been taxed. Because you will never be taxed, you want to load up your Roth IRA with stocks that pay dividends and stocks of smaller companies with lots of room to grow. Let's start with dividends first.

Normally, dividends are taxed at 15%, so they already have preferential tax treatment and since you're not paying taxes on any capital gains, it doesn't matter that dividends have a lower rate of taxation than regular capital appreciation on a stock. However, dividends, when reinvested and coupled with capital appreciation on a stock can generate significant income. When you receive this income, you can choose to reinvest it and buy more of the same stock, or some other company's stock, or just take it out and spend it. But the idea is to create a stream of income that is nontaxable and that flows into your account no matter what the stock market does.

Take a company like Pepsi for example. At the beginning of 2001, Pepsi paid $.14 a share every quarter. So this means that whether Pepsi stock went up or down in the first 3 months of 2001, if you owned 100 shares, you got a guaranteed $14 (100 * $.14) in 3 months. If you owned 1000 shares, you received a guaranteed $140 ($.14 * 1000) in 3 months. In the second quarter of this year, Pepsi's dividend was approximately $.54. This means that if you owned 100 shares, you earned $54 whether Pepsi's stock went up or down. If you owned 1000 shares, you earned a guaranteed $540. And the longer you hold dividend paying stocks, the more dividends you get, which allows you to purchase more dividend paying shares without even having to sell anything from your portfolio to do so. Click here for a visual demonstration of what I was just saying about Pepsi. As you can see, Pepsi's dividend nearly quadrupled over 11 years. Companies whose stock price increases along with increasing their dividends are prime candidates for your Roth IRA.

Unfortunately most companies that have dividends like the ones that I'm referring to are really large, and as a result, do not provide as much potential for capital appreciation. However, small cap stocks (stocks of smaller companies) that have dividends are what you should really look for when trying to build up a nest egg. Small cap stocks can potentially provide for 10- to 20-fold gains over several year periods, and when the company grows, the dividend usually grows along with it. Further, since Roth IRAs only allow you to place a limited amount of money into them, you need to supercharge the gains that you receive within them to make up for the limited contributions. Small cap stocks allow you to achieve outsized gains that can help you achieve financial independence. And because you cannot access the money in full until 59.5, you can afford to sit back and let those small cap stocks you've chosen run their course to maturity.

Take Deckers Outdoor Corporation - the maker of UGG boots - for example. Had you bought $1000 worth of this company's stock in May 2005, you would have $7000 today, even after all of the stock market ups and downs from 2008 to 2010. The moral of the story is that even though you are always trying to achieve maximum returns when investing, you want to make sure you achieve the maximum amount when using a Roth IRA because your gains will never be taxed.

If you are looking for a stock newsletter that has recommendations of dividend paying stocks, I recommend
Dick Davis Dividend Digest or if you want a dividend exchange traded fund, check out the iShares Dow Jones Select ETF or the SPDR S&P Dividend ETF. For newsletters that recommend small cap stocks, I recommend Cabot's Small Cap Confidential or TheStreet.com's Stocks Under $10. I've just said a mouthful, so I'll continue talking about tax advantage maximization in the next post.

The Difference Between a Roth IRA, a Traditional IRA, and a 401(k) Plan - Part 2

2012-08-29T11:13:00.001-05:00

Hello everyone.
Last time, I spoke about what a Roth IRA is and all of the nuances of it regarding contribution limits, withdrawal restrictions, and how it is taxed. Today, we will discuss the traditional IRA and 401(k) plans. Let's dive in.

TRADITIONAL IRA
A traditional IRA is very similar to a Roth IRA in that its purpose is to help middle income Americans save for retirement and provide them with significant tax savings. However, the crucial distinction between a Roth IRA and a traditional IRA is that whereas a Roth IRA is funded with after tax dollars, a traditional IRA is funded with pretax dollars. That is to say, you can write your traditional IRA contribution off on your taxes, thereby lowering your annual income. This allows you take advantage of the power of compounding interest without being taxed until you withdraw your contributions and gains, if any, at 59.5. The chart below shows just how powerful the power of not being taxed is when coupled with the power of compound interest over an extended period of time.

(*Note: The example above assumes a tax bracket of 25%, a weekly investment of $25, an annual wage increase of 3%, and 8% annual investment growth.)

Because the money that you contribute to a traditional IRA is pretax money (money that you have never paid income taxes on), you will be taxed on your gains and contributions at the income tax bracket into which you fall at 59.5 - the age when you can withdraw your money without penalty. In contrast to a Roth IRA though, you may not withdraw your contributions at any time. If you withdraw your contributions prior to 59.5, you will be taxed on the withdrawal at your current income tax bracket, in addition to being hit with a 10% penalty on the withdrawal.

For single people who wish to contribute to a traditional IRA, in order to qualify, you must not make more than $58,000. For those who are married and filing jointly, you may not make more than $92,000 if you wish to make a full contribution. Also, just like a Roth IRA, you make only contribute up to $5,000 a year if you are under 50 and $6,000 a year if you are 50 or older. However, unlike a Roth IRA which has no age at which you must begin taking distributions from the account, in a traditional IRA, you must begin taking distributions at age 70.5.

401(K) Plan
A 401(K) plan - or for those who work for non-profit institutions, a 403(b) plan - is an employer sponsored retirement savings plan where usually an employer matches (puts the same amount of money in for every dollar that you put in) your contributions up to a certain point. Usually this match from the employer goes up to 5 - 6% of your salary. Let's say you make $100,000 a year and are 35 years old. The maximum amount that an individual under 50 can contribute is $17,000 in 2012 and $22,500 for those 50 or older. Let's say you contribute the maximum of $17,000 per year. Your company will usually match no more than $5,000 to $6,000 a year of your contribution. Because 401(K) plans usually have mediocre investment options, are relatively inflexible, and concentrate all of your wealth in your job, I recommend only contributing just enough to your 401(K) to get the company match. Any left over money that you would like to invest should be socked away into a Roth IRA.

401(K)s are inflexible because if you want to make an early withdrawal, just like the traditional IRA, you cannot withdraw your contributions without being hit with a 10% penalty and federal income taxes. You may however take a loan from your 401(k) plan, provided that you pay it back within 60 to 90 days (the amount of time varies from employer to employer). However, you are paying interest on this loan while it is outstanding. Also, if you quit or lose your job, then the loan becomes immediately payable. Lastly, if hardship withdrawals are allowed in the plan, you may be able to withdraw money to prevent foreclosure/eviction, pay for qualifying educational expenses, and cover any medical expenses not covered by the company insurance plan. However, a 10% withdrawal penalty will still apply to any distribution.

In my next post, I will discuss how to choose investments for each of these vehicles so as to maximize the tax advantage you receive in each. But if you would like a chart view of the distinctions between a 401(K), a Roth IRA, and a traditional IRA, click here. Until next time....

The Difference Between a Roth IRA, a Traditional IRA, and a 401(k) Plan - Part 1

2012-08-28T10:19:00.000-05:00

Hey everybody.
Today I'll be discussing the difference between a Roth IRA, a traditional IRA, and a 401(k) plan. But before I get into the nuanced differences between the things listed above, let me briefly discuss the one thing all of the above have in common - a Roth IRA, a traditional IRA, and a 401(k) plan are all investment vehicles and not investments themselves. They are not something that you invest in. Rather, they are a place for you to park your money, like a checking or a savings account, but within each you can choose to invest in either stocks, bonds, mutual funds, and ETFs (exchange traded funds). The flexibility of the investment options within each investment vehicle and the restrictions on when withdrawals can be made and how such withdrawals are made is where the distinctions come in. So now that we know the overarching similarity between the accounts, let's dive into what each one is.

ROTH IRA
A Roth IRA is a great investment vehicle and is the most flexible of all of the accounts. It was created by Senator William Roth of Delaware back in 1997. Its purpose is to provide a tax advantaged account in which middle income Americans can save for retirement. This is how it works. In order to be eligible to fully contribute to it, if you are single, you cannot make more than $110,000 a year. If you are married and file taxes jointly with your spouse, you cannot fully contribute to it if you make more than $173,000 combined.

The maximum contribution that may be made to a Roth IRA by any individual who qualifies is $5,000 per year. (Note that as the cost of living rises, Congress and the Internal Revenue Service raise the amount that can be contributed every few years.) Individuals who are eligible to contribute and are 50 yrs. of age or older may contribute $6,000, instead of the $5,000 that everyone else is limited to, in the 2012 tax year. This is because people in their 50s are closer to retirement than the rest of us and the government wants to encourage them to sock away more money.

As I said before, there are many advantages to the Roth IRA, so let me elaborate on them. The first is that a Roth IRA is funded with after-tax dollars, which means that if you withdraw the money at 59.5 yrs. of age, all of the gains that you have accrued will not be taxed. I repeat, if you withdraw the contributions to and the gains accrued in your Roth IRA at 59.5, you will NEVER have to pay gains on that money! The downside to the Roth IRA is that because it's a retirement account and has such great tax savings, you cannot withdraw all of your gains and contributions before 59.5 without penalty. The penalty to withdrawing your money early and not having such withdrawal fall into a qualifying exception is that you will be taxed at your normal federal income tax rate on your gains, in addition to a penalty of 10% on the amount of the withdrawal.

On the flip side of things though, you can always withdraw however much money you contribute to your Roth IRA without penalty and without ever having to pay it back. You may not, however, withdraw your gains without penalty at any time. Here's an example of what I mean: Let's say you have contributed $5,000 a year to your Roth IRA for 3 years and over the course of that 3 years, your total $15,000 contribution has grown to $20,000. You are entitled to withdraw up to $15,000 without penalty, but you must leave the remaining $5,000 you have earned there until 59.5 or else you will be taxed.

On top of all of this, there are a few loopholes where you actually can withdraw contributions and gains without being penalized. Anyone who holds a Roth IRA is entitled to withdraw up to $10,000 (contributions and gains) in order to make a down payment on a first home. However, the Roth IRA holder must not have owned a home in the previous 24 months and must have held the Roth IRA for at least 5 years.

Lastly, you can invest in any type of security under the sun in a Roth IRA. This means stocks, mutual funds, bonds, stock options, index funds, and ETFs.

In sum, a Roth IRA is a great option for almost everyone, but especially for those who think they will be in a higher tax bracket as they near retirement age. This is because the money that you put into a Roth IRA, will never be taxed, provided you adhere to the restrictions regarding when you can withdraw money. In Part 2, we will discuss what a traditional IRA and a 401(k) plan are and how they are different from one another and from a Roth IRA.