No need to pay a property manager 10% of your rents. They aren’t concerned about keeping your tenants happy and expenses low.

I self-manage 30 properties and it takes very little of my time.  Doing one or two properties will be a breeze.

I’ll cover these 3 biggest time savers for you:

1. The secrets to Tenant Screening – including denying applications
2. Dealing with Maintenance and Repairs
3. Rent Collection including the right way to handle late fees

Let’s dive in.

Tenant Screening

First, where do we find the tenants that we’re going to screen?

Well, there are numerous ways to list properties, but I suggest these two simple methods.  

Facebook Marketplace and Zillow.

Both are free at the moment.  Zillow has a premium listing option for $29.99 for 90 days.

One thing I love about listing on these two platforms is they are not phone based.   Inquiries come on the app and/or by email.  you can keep your conversations text based and not waste time talking with applicants until they are prequalified.

Now that we have our property advertised, let’s screen applicants.

This is the part of property management that will either make or break you.

You will either have problem tenants that bleed you dry, or happy tenants that pay on time and stay for years sooooo listen up!

Tenant screening is about reducing your risk of problems.  You do this with rental criteria.

Certain types of criteria identified in the fair housing act are illegal to use.  Knowing those will keep you out of legal trouble.  

Here they are:

Fair Housing Act

You cannot discriminate based on race, color, religion, sex to include gender identity and sexual orientation, nationality, disability, and familial status.

What ARE you allowed to use as criteria to find a good or low-risk tenant?

You can use information like how much their income is

information given from prior landlords or property managers about their on time payment history and whether or not they honored the lease., 

info from credit, bankrupcty and eviction reports, 

and in most states, the existence of felonies.

Here’s a recommendation of rental criteria you could use on your properties that would be legal in most states.  Check with a real estate lawyer on these before you do this for real. 

Recommended Rental Criteria

1. Verified income of at least three times the rent
2. 6 Months at current job
3. Good rental reference
4. Credit score of at least 600
5. No evictions, felonies, or open bankruptcies

Depending on your area, you may want a higher credit score, but I wouldn’t go lower.

While most of these are self explanatory.  Let me talk briefly about a prior rental reference.

I think it’s smart t avoid first time renters.  This means you are saying no to most people just moving out of their parents homes, and even people in college or just getting out of college.

I’ve found that one of the best indicators of success with tenants is that they’ve already done it successfully with someone else. 

Don’t feel bad about turning down first time renters, there are plenty of apartment complexes and landlords that specialize in that.

Now that you have these legal rental criteria, you use those to prescreen those that contact you on facebook marketplace and zillow.

I’m going to share a process for this that saves the most time and energy, assuming you’re a busy person.

Prescreening Applicants

I recommend not showing a property to someone until they’ve filled out an application.  The application is free, so you aren’t wasting their money, and youre not running a credit or background check until after they’ve viewed the property.

Some will complain that they want to see the property before filling out an application, but too many people lie about meeting my qualifications, and taking the time to show them the property is just a massive waste of time so make sure they qualify before showing the property. 

You’ll get a lot of inquiries for your property on zillow and facebook.  Most of them are not qualified.  Here’s how to weed through those and get to the right one.

I recommend cutting and pasting the same initial message to everyone who responds.

Give basic info about the property, 3 bedroom 2 bath in this neighborhood-  list your criteria, and then ask them where they work and how much they make every month.

More than 90% won’t answer you because they realize they won’t qualify. 

Many will yank you around by saying they want to see the property first, or they don’t like giving this info out, or they want to talk on the phone and explain their life story and why they are a special snowflake and you should give them an exception.

Be polite, but insist on texting instead of phone and getting the answer about how much they make.  If they don’t make enough, they don’t qualify.  No need to waste your time or theirs.

If they dont have a traditional salaried or hourly job with a paystub, let them know they can show self employed tax returns to prove income.  

If they get rude or argumentative, then stop responding and move on.

If they say they make enough, then confirm by asking if they meet the rest of the qualifications as well.  Ask them specifically to estimate what their credit score is and get a numeric answer from them.

If they claim they fully qualify, then ask them to fill out a free application, and then you can arrange a time for them to view the property.

Some will refuse to fill out the application before seeing the property.  That’s fine.  Tell them it’s your process and it’s up to them.  Don’t waste time on people who argue or get rude.  Just move on.

Once you have filled out applications, your job is simple.

You need to make sure they weren’t lying about meeting your criteria.

Do people lie on applications? 

Hell yes they do.  

Here are the 3 main things you need to do to make sure they actually qualify.

1. You will contact their employer to verify income.  You will also have copies of paystubs and copies of checking account statements that show they were making rent payments and show deposits from their job.
2. You talk to prior landlords or property owners, or in some cases email them to get a good reference
3. You will run credit and background checks.  Don’t take a credit or background check that someone provides you, they are often doctored. Some will say they already paid zillow to do a credit check.  I don’t accept these.

If these three things check out, this will make a good tenant.

What if you end up with two or three qualified tenants?

Your rule for choosing a tenant should be the property goes to the first qualified applicant based on your rental criteria.  If you stick with this rule, and have legal rental criteria, you’ll stay out of trouble.

Denying Applications

Most applicants will not meet your rental criteria.

You need to deny applications the correct and legal way.  This method works in most states, but you need to run this process and your rental criteria by a real estate attorney in your city to make sure you’re legit.

You need to let applicants know either by mail or electronically by email that you are not selecting their application and tell them why.

Typically this would be because they did not meet one or more of your criteria, but it also could be because they didn’t complete the application or gave false information.

This means they lied.

An example of what you might say is, We are unable to move forward with your application because you did not meet the income requirement, or because applicants with evictions do not qualify.

If a credit score was ran, you need to provide information about their consumer’s rights under the Fair Credit Reporting Act.  I use www.rentprep.com for credit and background checks and this is taken care of automatically.  

That’s #1 tenant screening.

The next important thing to get right in self managing real estate is number two how you handle maintenance and repair issues.

Maintenance and Repair Issues

The trick to this is setting up expectations from the beginning, and then sticking with them.

Tenants will test you, much like children test their parents, to see if you are a pushover.

Explain before they sign the lease how repairs will work.

You will fix things promptly that break or wear out.

But….

If something is broken because of misuse then they will be responsible for paying for the repair.

Give an example.

If they call because the garbage disposal stopped working, and the plumber finds out they put pistachio nut shells and a few children’s toys into the garbage disposal (i don’t make this stuff up). That’s the tenants responsibility.  

They pay that bill.

Conversely, If the garbage disposal is broken because it’s worn out and old, that’s your, the landlord’s responsibility.

Here is a great hack for communicating with tenants and contractors about maintenance issues.

Encourage your tenants to use texting only.  If they call, I don’t answer, but then text them back and ask them what they need. 

When they text you to say, for example, the AC isn’t working, put them in a group text with yourself and your AC guy.  AC guy will coordinate with the tenant by text and get it taken care of.  You will monitor the group chat that you started until it gets done.  

Then you pay AC guy immediately, and have him email or text the receipt.

You can also use a bank billpay option to send electronic checks for free.

If the tenant’s maintenance  request seems a little iffy, have them text pictures and video.  You or the handyman may be able to walk your tenant through solving the problem without going over.

This is common.

Sometimes people just have their thermostat on the wrong settings, or just need to flip a circuit breaker.  Boom, you just saved a hundred bucks.

Pictures also help contractors bring the right equipment on their initial visit, which also saves time and money.

It’s smart to get your contractors and handymen used to doing everything by text and taking pictures of the work, both before and after.  In exchange for this, you typically pay them immediately, which, it turns out, they like a lot.

All of the sudden, they’ll respond to your requests quickly.

Now onto self management tip #3.

Rent payments and late fees

I’m going to make an important recommendation. 

Highly encourage your tenants to pay you electronically.  Ideally on auto pay.

I use a software called tenantcloud to manage my properties, and it allows them to pay automatically for free by ACH transfer, which is a bank transfer.

Sometimes they can set up automatic payments from their own checking account.  They can also use zelle or a billpay feature, which is usually free.

Discourage cash payments.  It’s a hassle, you have to go in person to get it, then you have to deposit it, you could be beat up while carrying the cash, there isn’t a paper trail, just don’t do it.

I don’t like money orders because if they get lost in the mail, it’s typically a month or two to get it replaced.

Collecting rent isn’t that tricky, but getting people to consistently pay on time can be.

With good rental criteria, you’ll weed out most problem tenants, but you will still get tenants that want to see who they have to pay on time each month, and who can wait.  

Don’t be the one who’s willing to wait.  Payments just get later and later each month.

Let me teach you how to combat this.

Late Fees

You need a process, and when you stick to this process, people realize paying rent late isn’t going to be an option, and they stop doing it.

You need to do these two things.

1. The lease says and  you verbally tell them before signing the lease that late payments are almost never waived, even for family emergencies, loss of job, or unexpected events.
2. Be specific about which day the late fee is charged.  maybe on the 5th day of the month and stick to this.  Sometimes state law dictates a grace period.

When people inevitably tell you they’ll be a few days late this month, just remind them which day the late charge is added and how much it’ll be.  

When they give you the reason they’ll be late, sympathize, but politely remind them again which day the late fee will be charged.

This works better than any other approach I’ve seen.

Armed with what you learned today, you can manage your own rental properties spending minutes a week on it.

Do you want to learn more about being a great landlord and making money in real estate?

Keep reading my stuff on Tik Tok and Youtube

Check me at at richonmoney on Youtube and Tik Tok.

Rich on Money

The post Manage your Rental Properties while Working Full Time appeared first on Rich on Money.

I’ll share my 8 biggest red flags I see on rental applications.

Then, I’ll talk about fair housing laws and how to avoid getting sued.

Next, I’ll show you the best rental criteria to judge applicants by, and walk you through how to legally deny applications.

I self manage 30 properties, and it takes very little of my time.

Here we go with red flags on applications.

Some of these are kinda funny.

In order of severity with Number one being thee worst!

#8 The instant break-up

This one’s kind of funny, and I’ve seen it many many times.

I have an important rule. Any adult who will live in the house is on the lease and fills out an application.

This is so you can run a credit and background check on them.  You don’t want a felon or someone who’s been evicted living at your property.  

Ask me how I know.

On some occasions, I’ll have a woman apply for the property.  I ask if anyone else will be living at the property and she will say her boyfriend.

I say great.  I need him to fill out an application so we can do a credit and background check.

This usually results in an instantaneous breakup. It’s miraculous to see.

You know what, I thought about it, and my boyfriend won’t be living at the property.  Just me.

This is a huge red flag.

Let her know that you cannot continue processing her application until her boyfriend fills out an application.  

You will get lots of pushback, texts, phone calls, voice messages, promises he won’t live there and maybe some profanity, but stick to your guns.  

You’re not denying her, but putting her application on hold until the adult she indicated would live there fills out an application.

If you let her move in, she’ll more than likely sneak that boyfriend in, and he’s probably  a shady dude.  Don’t fall for it.

#7 Staying in a motel 

When you ask someone where they are currently staying.  They might tell you they are currently at a motel.

They usually talk about how expensive it is and how it’s a dangerous place to live, especially if they have children.  

And they would be correct.

I’m not talking about staying at a Hyatt or Marriott for a few weeks between properties, I mean someone who can’t find anyone to rent to them, and is staying in a by the week or by the month seedy motel.

Think a really bad run down Motel 6.  Like something out of a movie.  It’s the kind of place where drug deals and prostitution is common.

These people will often come off as desperate.  They are.  And while I sympathize, it is a bad idea to rent to them.

The typical applicant does not end up in motel like this.  It is a symptom of chaos in their lives.

Common reasons for being in this type of motel are thrown out of the place they were currently living, being evicted, or having felonies and substance abuse problems.

They will likely have unsteady income if any, and will not be able to give you a good rental reference.

Proceed with caution.

As with all red flags, not everyone in a motel is bad news, but many are.

#6 My current landlord is horrible

There are several variations of this.  The place I live is dangerous and I gotta get my kids outta here, the landlord won’t fix anything, the landlord is evil, etc.

It is important when finding a suitable tenant that you can confirm they have successfully rented from someone else in the past.

Your best chances of avoiding problems are when a former landlord or property manager tells you, yes this person paid on time, Yes, they didn’t cause problems,, and yes, I would rent to them again.

The big problem with people who complain about their landlord is they usually have a very different story than their landlord or property manager does.

There is no way of knowing who is telling the truth in these cases, the evil landlord, someone scary and heartless like me, or the poor innocent tenant.  Unfortunately, you need to give the benefit of the doubt to yourself.

Try talking to previous landlords, but If you can’t find a property manager or landlord that will give this person a good reference, don’t rent to them.

#5 My Mom, the landlord

I’ve seen this one myself enough that it has to be on this list!

Newsflash.  Sometimes tenants lie to us.  They know something about their past will keep them from getting the property, so they lie about it.

Ask me how i know.

Some applicants don’t want you talking to their landlord because they were evicted, or had other serious issues.

So they might list the actual address they lived at, but then list a friend or family member to pose  as the landlord when you call.

How do you get to the truth if you suspect this?

A few suggestions.  Look up the address on google maps.  If it’s an apartment complex, contact the property management office yourself.

Next, lookup who owns the property.  This is done through the county’s property tax website.  I’ve done a video about how to look this up. I’m pointing up at it right now.  Click on it.

Whoever you talk to on the phone, make sure they either are the owner or know who the owner is.  If they don’t, this is a red flag.

Ask for a copy of the lease.  If they can’t or won’t provide it, red flag.

Ask for a copy of their drivers license.  This can sometimes reveal an address they lived in that they haven’t told you about.  Maye they were evicted from this address.  

Lastly, you should request checking account statements.  These statements will show rent payments and work deposits.  If they don’t, that’s an issue!

Living with friends and family

Here’s a good hard fast rule.  Don’t rent to someone that can’t give a prior rental reference.  It’s best not to take first time renters, even with cosigners.

Sometimes, when you ask for a prior rental reference, they’ll tell you they’ve been staying with friends or family.  

Other times, they’ll tell you the old landlord isn’t reachable because they died or moved away.

If someone is in their thirties or older, and claims they’ve been living with friends and family up to that point, this is a red flag.  That’s not normal, and they probably are hiding something and have problems with income and or prior evictions.

Friends and family members don’t count for prior rental references. Don’t take on first time renters like students or people that just moved out.  They are sometimes flaky, disruptive, and don’t typically stay long.

#3 I’ll pay six months in advance

Lots of amateur landlords don’t understand why someone offering to pay rent in advance is a huge red flag.

Who doesn’t want more money up front?

I don’t.  Why?  They know they are high risk.

If they offer you rent in advance, this is usually in exchange for you not asking too many questions.  Not confirming income, running a credit or background check and talking to prior landlords or property managers.

Sometimes, this is someone who is involved in illegal activity. 

Make sure you verify income, prior rental references, and do credit and background check.  It is extremely likely you’ll find something you don’t like when someone offers advance rent.

Onto number 2.  This and number one are almost always bad news!

#2 I need to move in fast! 

I’ll give you deposit and first months rent right now!

Again, amateur landlords might get excited about someone who tells you they’ve got the first months rent and deposit in cash and can move in today.  

Maybe it’s taken a while to rent this property out, and they were getting nervous.

This person is not your solution.  This request is a huge red flag!

Someone who says they want to move in right away is usually a sign of drama or chaos in their lives.

The first strange thing is, they are almost always willing to do this without even looking at the property.  They are desperate.  If it has walls and running water, they’ll take it.

They’ve likely been evicted and have nowhere to go.  They got kicked out of a friend or family members house, and don’t want to end up at a motel, which was #7 on the list.  

They will ask you how long the process will take, and press you to do it faster.  They will seem desperate and in a hurry.  They are.

Always tell them the process takes at least a week or so, and it is not something you are willing to rush..

Let them know if they meet your criteria, you’ll do your best to get them in as soon as possible.

FYI, they know they won’t meet your criteria.  That’s one of the reasons they want to move in  today.  Once they’re in, you can’t get them out!

Go through your process of verifying income, prior rental history, credit and background check, and take your time.

Onto the phrase that is the biggest red flag in real estate investing in my experience.

Everytime I hear it, I have a good laugh.

#1 on our list.

#1 If you’ll just give me a chance!

This has a very specific meaning.

It means the applicant acknowledges that something about them is alarming or undesirable.

Usually it’s a combination of income, credit, criminal, and even eviction issues.

They want you to take a chance on them anyway, as they promise this time will be different and they are turning their lives around.

They are appealing to your sense of charity.  You have the power to give someone down on their luck a chance.

Isn’t that beautiful?

If you would like to do this, and it makes you feel good to provide charity through your real estate business, then go for it.  I hope you have deep pockets.

But I can tell you, every time I’ve done it, I’ve lived to regret it.  It’s cost me thousands, sometimes more than ten thousand dollars to clean up their damage and mess.

If you want to be successful in real estate, you have to acknowledge risk when it presents itself.

If you ignore obvious risk factors, you will not be in real estate long.

How do you mitigate your risk legally.  

Here’s the process, and I’ll break it all down for you.

1.  You understand fair housing laws and have rental criteria that don’t violate them.
2. You deny applications that don’t meet your legal criteria.

Here’s what you need to know from the Fair housing act to keep yourself out of trouble.

Fair Housing Act

You cannot discriminate in property rental based on

• race
• skin color
• sex
• religion
• nationality
• disability
• family status

Family status means you can’t prefer married couples or exclude single mothers or say you don’t allow children, etc.

Some states can add more to these rules, but no one can do less. 

What ARE you allowed to use as criteria to find a low-risk tenant?

You can use information like what their income is, information given from prior landlords or property managers about their payment history and ability to take care of the property, info from credit and eviction reports, and in most states, the existence of felonies and bankruptcies.

Here’s a good example of rental criteria that you could use on your properties that would be legal in most states.

• Verified income of at least three times the rent
• A good rental reference
• Credit score of at least 600
• No evictions, felonies, or open bankruptcies
• Incorrect information (this means a lie) on the application
• Incomplete application

The income and credit restrictions I just listed work well in a city where a 3 bedroom 2 bath house rents for $1000 a month.

If you are in say Southern California, and the same three bedroom rents for $3,500 a month, then you may have a different income and credit requirement.

600 is pretty low, you may decide 700 or higher.  3 times the rent may be tough in So Cal.   You can adjust lower.

When you get a rental application, make sure they meet these criteria, and then confirm it all yourself.  Make sure no one is fibbing on the application.

You will contact the employer to verify income.

You will talk to prior landlords or property owners, or in some cases email them to get a good reference.

You will run credit and backgrounds checks..  Don’t take a credit or background check that someone provides you. You need to run them yourself.  Some will say they already paid Zillow to do a credit check.  I don’t accept these.

Your rule for choosing a tenant should be the property goes to the first qualified applicant based on your rental criteria.  If you stick with this rule, and have legal rental criteria, you’ll stay out of trouble.

Now for…

Denying applications

Most applicants will not meet your rental criteria.

You need to deny applications the correct and legal way.  This method works in most states, but you need to run this process and your rental criteria by a real estate attorney in your city to make sure you’re legit.

You need to let applicants know either by mail or electronically by email that you are not selecting their application and tell them why.  An example would be, did not meet the income requirement, or applicants with evictions do not qualify.

If a credit score was ran, you need to provide information about their consumer’s rights under the Fair Credit Reporting Act.  I use www.rentprep.com and this is taken care of automatically.  

So I gave you 8 red flags to consider when looking at rental applications.

To be clear, you do not deny people for having one or more of these red flags.  It is just an indicator that they will likely not meet your legal rental criteria.  So be thorough in verifying what’s on the application.

Remember, tenants sometimes lie.  

All you need to do is take their application, make sure it your criteria, and then make sure what they wrote is true by checking yourself.

Too easy.

If you have more questions about rental applications and the process, ask in the comments below.

Rich on Money

The post Avoid These 8 Massive Red Flags in Rental Applications appeared first on Rich on Money.

There are massive changes coming to the TSP this year, and they’ve totally botched something that was supposed to be awesome!

For starters, They are going to raise the expense ratios on the funds.  While that sucks, they are actually doing something much worse.

They are giving access to thousands of mutual funds.

That sounds awesome right?  Wrong.  They totally screwed this up.  I’ll talk about how first.

Here’s some of other changes to TSP coming up this year:

• They are going to enhance online security – who cares 

• Coming out with a mobile app, ok that’s kinda cool – 

• And raising the contribution limit – about time

I’m going to quickly go over what’s important about each one of these, but I’ll start with the mutual fund offering, because it’s some juicy gossip and I want you to avoid getting screwed over by this.

Access to mutual funds

One of the biggest changes to the TSP is expected to hit this summer – the mutual fund window. In addition to the 5 investment funds currently available, there will be a way to take a portion of your TSP funds and invest them in regular mutual funds, with more than 5,000 to choose from.

Does this sound good!  

Yes.  It does.

Is it good. 

Hell no.

The TSP has managed to royally screw up offering mutual fund investments by doing this.  Drum roll please:

Charging absurdly high fees.

That’s right.  The fees that I’m hearing we are going to pay for this option means I won’t recommend it to anyone I know.  Yes, that means you.

Right now, as it stands, investing in the TSP family  of funds is pretty.  Less than one tenth of one percent.  I’ll go more into this a little later.

So What will you have to pay to invest in this new mutual funds offering?

O, i’m almost embarrassed to say!

Here we go!

For starters, A $95 annual maintenance fee.  Hell no.  I’m  out.!

O no, there’s more!

And A $55 annual fee to cover administrative expenses.

The hell you say?  Let me get this straight.

There are two separate annual fees!  

Yep.  

I’ve seen enough.

O there’s more!

$28.75 per trade.  

That’s buying into or out of a mutual fund.

And, on top of all that, you still have to pay any fees and expenses specific to the individual mutual funds you choose.

What does that mean?  

Well, some mutual funds have front end or back end loads. That means you pay a fee to the mutual fund company when you buy in or out of the fund.  That will be in addition to the TSP charging $28.75 per trade.  

These loads can be as high as 6%. 

Never pay a load for a mutual fund!  

Not even one percent.

Dave Ramsey’s mutual funds I believe are this high, and that’s highway robbery!

Let me get into some of the other specifics about how this mutual fund window will work.

God help us.

You can’t use it unless you have at least $40,000 in your TSP.

The minimum initial transfer amount is $10,000.

Your transfers can’t exceed 25% of your TSP balance.

In other words, you only invest 1/4 of your TSP balance in these mutual funds.

Mutual fund transfers count towards the TSP’s maximum interfund transfer limit of 2 per month.

This interfund transfer limit is kind of a lame and  needs to go away.

The TSP mutual fund window has been 13 years in the making, and here’s rich on money’s take on this.

They totally effed it up big time.

It will not make financial sense for most people to invest in mutual funds in the TSP.  The fees are absurdly, almost criminally high.

You are far better off sticking with the traditional C, S, I, F, G and lifecycle funds. 

If you want mutual fund exposure, it makes a lot more sense to max IRA contributions each year at a company like Vanguard, Fidelity or Charles Schwab.  

There are no fees for investing in their mutual funds, and their expense ratios are the lowest you can get.

Oooo TSP,   I’m so disappointed in you.

Not to despair, just keep investing in the traditional TSP lettered funds and ignore this botched up mutual fund window idea.

Disclaimer:  If the TSP decides to sponsor this youtube channel once I blow up and go viral, I will have to delete this video, make a new video supporting their high fees, and find a way to live with myself.

And as long as they pay me enough, I’ll find a way to justify it in my mind.

Let’s go over some of the other significant changes now.

Onto another  juicy topic…

Raising expenses

The TSP is raising its expenses on its traditional lettered funds.

Don’t get confused, this is a separate issue than the mutual fund window debacle.

I’m talking about the expense ratio for the C S I G F and lifecycle funds.

So how much are expenses going up?  

Let me tell you.

The TSP administrators have lots of upgrades to TSP in the works.

These higher costs will ultimately mean higher expense ratios for the TSP’s 5 main funds: 

Someone’s gotta pay for all these upgrades.  News flash, that’s you.

Up until recently, the TSP expense ratio was about .05% for each fund. This is relatively low, but not super low.

It’s going to be raised to about .076% percent to pay for some of these upgrades.

Is that a lot?  Well, let’s compare the C fund, or S&P 500 index to the expense ratios for identical funds at Fidelity, Charles Schwab, and Vanguard.  

So C fund at the TSP is about .07%

At fidelity, it’s equivalent fund is .02%

Schwab .03% 

and Vanguard .04%  

To be clear, .07% isn’t gonna bankrupt anybody.  It’s still very low.

We are talking about less than one tenth of one percent.  It’s not worth worrying about. It’s far far less than most companies or especially what money managers or financial advisors would charge.  

But the difference over a lifetime with TSP vs. these cheaper funds I mentioned can definitely be thousands of dollars. That might seem like alot, but your account should have a mil or 2 by the time you retire, so a few thousand dollars is small potatoes.

Verdict:  this change is nothing to worry about.

Onto the next change – 

Raised contribution limit

This happens every few years.  The limit for contributing to the TSP last year was $19,500.  It has been raised by $1,000 to $20,500 for 2022.

Nice.

These contribution maximums mimic whatever the max is for 401ks.  These are usually raised every two years or so.

To get the maximum contribution this year, roughly $1,708 needs to be contributed monthly. 

Keep in mind, don’t contribute too quickly to your TSP.  If you hit the max before the last month of the year, your contributions stop automatically, but so does your matching, if you get matching.  

If you are looking to truly max your tsp and matching, you need to contribute the exact right amount each month, so that you don’t run out of contribution limit before the last paycheck of the year.  

Get with a finance officer to make sure you set this up right.

Onto the next a change…

Mobile App

When surveying what TSP participants want, 57% of those under the age of 40 expressed a desire for a mobile app.  

It will have a new chat tool that will be operated by TSP representatives, a virtual assistant that is run by artificial intelligence, secure log-ins that will utilize fingerprint and face recognition technology on users’ phones, so basically apple friendly.  

They’ll also have a mobile check deposit for adding funds to TSP accounts.

Wait a second, this is starting to sound like a professional organization here!

Are you sure the tsp is linked to the federal government?

As a result of this, all federal employees, retirees, and beneficiaries that own TSP accounts will need to set up a new log-in to access their account online.

TSP account holders will also need to establish multi-factor authentication, and one-time passwords to confirm the user’s identity. 

These new security procedures will also allow for more forms to be processed electronically.

This will require a blackout period where TSP participants won’t be able to access their accounts online. Not sure how long, maybe a day or two.  

Don’t worry.  We’ll live.

So in summary, the TSP is changing the following:

Offering mutual funds, which will suck.

Raising expenses on lettered funds, which is no big deal.

Raising contribution limits, which is awesome and

Setting up a mobile app with enhanced security features.  Cool, but I kind of expect this from something as large as the TSP.

See my most popular post – 

How to Invest in the TSP in 2022

Rich on Money

The post TSP – Massive Changes in 2022 (not good) appeared first on Rich on Money.

I had to be. I spent my entire career moving around the world with the military. I did most of my investing from overseas, including buy-and-hold properties and flips.

I’m going to teach you to manage all your properties with at least 75% less work than before. 

I’m not exaggerating this number.

The way we traditionally manage our properties is out of the ice age. All these phone calls, trips to the bank, trips to your property, personally showing your listings,  post office runs, retrieving cash payments, all unnecessary.

I’m going to show you a better way.

The solution is simple.  It’s leverage technology.  Make it all smartphone based.

Here’s a summary of how you can do it, then I’ll break down each section in a little more detail…

• Applications and leases all done online.  No paper..  No need to ever meet in person (unless you want to).
• Showing Listings does not require your time or presence
• Communications with tenants and contractors by text
• All payments are electronic 

Here’s a deeper dive into each part of online real estate management

Listing the Property

I use google voice to get a free number that has texting and voicemails you can change to be specific to the property.  This number is now separate from my personal calls and texts, but can be managed from my smartphone or laptop with the google voice app.

Your market may be different, but I do very well listing on only Zillow and Facebook Marketplace.

My answering machine message tells applicants about the property.

I list my criteria of 3 times the rent, no evictions, and good rental history, and tells them I’ll text them with more info.

Anyone that texts or leaves me a message about the property gets an automatic text from me with all the info,  a link to the listing with pictures, and instructions on how fill out an online application for free.

You’ll get lots of inquiries from Zillow and Facebook Marketplace.  I text back that same prepared text to them.   It takes them to my listing link hosted on the Tenantcloud property management website, which is what I use for most property management functions. 

You can also use something like Buildium or Cozy for this.

Most people will ignore your texts because they don’t meet  your minimum criteria.  They likely are getting evicted, or have a poor income or prior rental situation.  

Some will try to argue with you.

“Make an exception for me, my two evictions weren’t my fault”, etc.

I don’t waste time on this.  If they meet the minimum criteria that I text to them, I ask them to fill out a short free online application. 

If they don’t meet it, i ask them to reapply when they do, and I end the conversation..

I have a few cut and paste texts that use over and over.  It’s much quicker than taking phone calls. You screen 97% of applicants out in your first text, not wasting time on people who have evictions or don’t have jobs.

I may do a separate video on the specifics of this where I actually show you my script.  Comment if you want that.

Showing the Property

Many people will argue with you that they want to see the property before filling out an application. This is usually a waste of time, because many people that inquire don’t meet the minimum qualifications to rent. 

I simply text them and say my application is free, I have plenty of applicants, and this is my process.  If they fill out the easy free online application, they will be able to do a self-showing at their convenience once they are pre-qualified.

Using the online applications I get, I verify these people have verifiable income that is at least 6 months long, good rental references, and no evictions or felonies. 

I verify they are telling the truth on their applications  I then allow them to do a self showing.  

Self Showings

I put a digital lockbox on the door, and then text them a code.

They can let themselves in, look around, and let themselves out. If they are an hour late or a no-show, it doesn’t waste any of your time.

I know what you are thinking, but this is actually a safe thing to do because I already have a copy of their drivers license, paycheck, checking accounts and lots of other personal info contained in the application. 

I’ve also verified income and rental history before this and I’ve asked them to estimate their credit score. 

Note: I don’t charge them to run their credit until they have seen and like the property.

I use a digital lock you can find at codeboxinc.com.  Here’s a picture of it.

I can give out codes to the door that last for one day, then expire.  I can use this for tenants or contractors. 

Parties you trust can have a permanent code.

If the applicants like the property, I send them an electronic request to run their credit, check background and evictions.  They pay for this.  

I also send them an online lease from the Tenantcloud website, and I ask them to pay a holding deposit of one months rent electronically so I stop showing the property to other people.

Pro tip:  I don’t stop showing the property until I have a holding deposit, and I’m clear and vocal about this.  If someone loves the property, they will give the deposit so they don’t lose it to someone else.

Communications

So far, everything you’ve done with your tenant has been texting and online. 

They will get used to, and prefer it to how they’ve done things in the past.  I let them know if they have a maintenance issues, to text me, and I’ll get it taken care of.

When they text me to say, for example, the AC isn’t working right, I put them in a group text with myself and my AC guy.  He will coordinate with the tenant by text and get it taken care of. 

I will monitor the group chat until it gets done.  I then pay him electronically.  I often use Cashapp for this in Alabama. 

I can also use a bank billpay option to send electronic checks for free.

If the tenant’s maintenance request seems a little iffy, I request texts pictures or video, and am often able to solve the problem, realize it doesn’t need attention, and maybe save a wasted service call. 

Pictures also help contractors bring the right equipment.

I get my contractors and handymen/women used to doing everything by text and taking pictures of the work, both before and after. 

In exchange for this, they typically get immediate payment, which they like.

Speaking of Payments…

Online Payments

A huge timesaver for me is taking electronic payments exclusively instead of taking cash, money order, cashiers check, or even normal checks. 

I never have anything mailed to me, so no lost in the mail excuse, and I don’t need to go to a tenants house or to the bank. 

I don’t have to chase people down to get paid.  Worse case scenario, I send a text to remind them.

The Tenantcloud service I use for property management has an online system built in for payments.  I

It’s connected to the accounting for the app.  Additionally, I use another another payment system that many like.

In my case, Cashapp.  Other services are Paypal, Zelle, Venmo, Apple Pay, Google Pay to name a few. 

I’m able to track all income and expenses in the Tenantcloud app, and I keep all receipts in the cloud electronically.  I have zero paperwork for my property management business anywhere. 

It’s all cloud based.

With 30 doors, my taxes and accounting are pretty damn easy.

I really should buy more properties and self manage, but damn, prices are skyrocketing. 

Let’s save that issue for another day

What flaws do you see in my strategy?

Any tips to add?

Rich on Money

The post My Four Secrets to Hands-off Property Management appeared first on Rich on Money.

I’ll tell you what they are.

I get nervous what I see Whole Life Insurance pitched as a good investment. 

One of the most questionable sales tactics I’ve seen is saying the returns are superior to traditional retirement account investing.

They suggest foregoing, or even liquidating traditional retirement accounts to quickly fund whole life insurance policies.

I’ve even seen this outrageous advice given in (questionable) military real estate groups.

When whole life is sold under these conditions, it’s a scam.

It is dangerous and wrong.

You will lose out on millions over a lifetime.

Today I’ll discuss what whole life insurance salesmen aren’t going to tell you about this complicated and expensive investment.

While there is a small need for something like whole life for high net worth individuals with unique circumstances (I’ll talk about this at the end), to say this is an appropriate investment for the average joe or typical military member or veteran is flat out irresponsible.

The strongest advocates of whole life insurance, which as far as I can tell are only the people who sell it, claim it is a better investment than the stock market or retirement accounts.

This is flat out wrong. I’ll explain the math below.

The people that are pitching this crap have no training in finances or investing.

They are, unfortunately, trained in sales and marketing. 

Their commissions are among the highest in the industry.

Term Life Insurance Defined

If you want to understand what whole life insurance is, you need to first know what the much more common and useful term life insurance is.

from Unsplash.com

This is probably what you are already familiar with, and for most people, this is insurance that is worth having.

A term life policy is where you pay a reasonable monthly premium for a set amount of years, say 20 or 30 years, and if you die during that time, you get a big payout.

In my case, I paid about $40 a month and had a policy for $1,000,000. 

That price was good until about age 50, then the policy ends.

Term life insurance is affordable because most people don’t die young. 

Most policies are never paid out.

And then the insurance industry thought up Whole Life Insurance.

Something way more complicated and unusually expensive that has limited usefulness to the average person…

There are probably much better places to put your money before it should end up in whole life insurance.

Whole Life Insurance Defined

Here are supposed benefits of whole life insurance:

• Guaranteed death benefit that gets paid even if you die of old age
• Cash value to borrow against to fund investments or emergencies
• Level premium payments that never increase
• Guaranteed and assumed rate of return that lets the cash value of your policy grow
• Tax advantaged growth supposedly much like retirement accounts

This sounds great, right!

Well, these benefits are confusing, and if the wrong salesman is presenting them, misleading.

Let’s break each one of these benefits down.

Guaranteed Death Benefit

It’s true.

Whole life insurance does have a guaranteed death benefit and term life insurance does not.

If it’s a million dollar policy, you will get that million if you continue to pay your premiums.

Sounds like a good deal right?  It’s not! 

Look how much you pay for this policy!

These are quotes from a website called policygenius.com that sells whole life insurance.

As you can see, a million dollar policy will cost you $827 a month. 

That’s like another mortgage payment!

Seem high?  It is.

10 to 20 times higher than an equivalent term life insurance policy.

You can get a $1,000,000 term life insurance policy for less than $50 bucks a month.

I’ll help you with the math. 

Whole life is 16 times the cost in this particular case!

Why so much more?

Because the term policy is only for the first 30 years or so.  You likely won’t die during that period and won’t get a payout.

Here’s the trick.  They are charging you so much freaking money because you are going to get the benefit amount when you die.

Even if you die from old age!

While that might seem appealing, it’s expensive and, for most people that understand investments, totally unnecessary!

Index fund investing vs. whole life

Let me explain exactly what I mean.

Let’s do a quick compound interest exercise that whole life insurance salesmen do not want you to understand.

Instead of buying this whole life insurance policy for $827 a month, let’s invest that money in an index fund for the long term.

This happens to be how I’ve been investing the last 25 years!

If you invest $827 a month for 50 years in index funds and it grows at a 7% average per year, you will have $4.5 million. 

If you buy a whole life insurance policy for $827 a month, after 50 years you only get $1M. 

Where did the other $3.5M go?

To your insurance company and your salesman. 

They thank you!

Whole life policies only grow at about 4%, and you still pay that fat commission.

Borrowing Against Cash Value

This is where the whole life insurance salesmen really try to lure in the real estate investors.

Something unique to whole life insurance policies is they have a cash value that you can borrow against.

The cash value in your policy is growing with your premium payments as well as by the guaranteed and assumed rate of return.

For many years, the cash value of your policy is less than the sum of your premiums because of the high commissions that need to come from somewhere.

Commissions are known to be 50-100% of one year’s premiums

Eventually, the policy starts making money, and you can borrow against that cash value for any reason you would like.

You are supposed to be impressed by this ability to borrow against your own policy.

They sometimes call this infinite banking or banking on yourself or being the bank. 

They try to make you feel like doing this means you are outsmarting the evil banking system.

Beware of evil banks! (unsplash.com)

That’s actually a pretty stupid thing to think.

Here’s what I would offer.

What if you had just invested the money yourself, making millions more than what your policy pays, and when you need money, just take it out of your account.

You’re not even borrowing at this point.  It’s your money!

You’ll make at least 7% in the market and millions more over a lifetime as I’ve already explained using index fund investing. 

This can be done in normal brokerage accounts or retirement accounts.  In both cases, you still beat the pants off a whole life policy!

Why borrow money from yourself through an expensive, overcomplicated policy with unimpressive growth and high commissions for seedy salesmen (no offense) and unimpressive growth.

No, this ability to borrow from your own policy does not impress me.

It appalls me.  The returns are abysmal for such a long-term investment. 

High commissions?  4 to 5% growth maybe?

Just so you can borrow against it?

If you need to borrow money for something, just go to a bank. 

They are actually not as evil as you think!

Level Premium Payments

from www.thecarconnection.com

Whole life insurance salesmen, like the one pictured above, like to remind us that the premiums never go up.

This is actually true.

But here’s the problem.

In the example I just talked about, the whole life policy is more than sixteen times more expensive than a comparable term life policy.

Of course these premiums never go up, they are already sky high!

Surrendering your policy

Here’s another big issue with these premiums.

Let’s say you lose your job for six months.

You’ll need to come up with that $50 a month so you can keep your term life insurance policy for a million dollars. 

No big deal.

What are you going to do about your $827 monthly obligation for whole life insurance. 

That’s the size of a frickin’ house payment!

You won’t be able to pay it!

When you stop paying, you surrender the policy and get your cash value minus penalties. 

This causes an already poor investment to get worse.

You don’t get the death benefit, you may get taxed on money you thought would be tax free, and you may have losses that you can’t deduct.

Surrendering whole life policies ends up happening to more than half the people that take out these absurd plans. 

They realize it’s a raw f’ing deal. 

Guaranteed and Assumed Rate of Return

Now let’s shift to the next overexaggerated benefit touted by whole life insurance salesmen.

Again, no offense to these salesmen. 

They’ve gotta make a living!

from www.unbounce.com

These policies typically have a guaranteed rate of return on the cash value of the policy of at least 2%.

The returns should be higher than that, and usually are.  They also give you an assumed rate of return that might be 4-5%.

The cash value of your policy will likely grow at some rate between these two numbers.

While that’s not a bad rate of return compared to a savings account, it’s a really crappy rate of return for decades of investing, or even a lifetime!

As I already covered earlier, if your investments grow at even 7% (and higher is likely),  you stand to make far more money investing it yourself in the market.

In my earlier example, you make 4.5X more money investing it yourself over 50 years.

Tax-Free Loan Benefit

As stated before, you can borrow money against the cash value of your policy.

While you typically pay interest for this privilege, this is a tax-free loan.

The salesmen I’ve ran into like to emphasize this tax-free loan as an amazing benefit for real estate investors.

It really isn’t a benefit, as all loans are typically tax free. 

To say that’s a benefit is a stretch.

When you borrow money, you still have to pay it back. 

That is why it is not taxed!

Sorry, a tax-free loan is not a unique benefit to whole life insurance policies.

Tax-free death benefit

Advocates of whole life insurance policies , which are very few outside of the salemen, will talk up the tax benefits of the policy. 

Let’s understand this.

They say that when the death benefit is paid, it is generally not taxed as income.

Well isn’t that something!

Actually, it isn’t something.

Almost any death benefit of any kind, including the 16 times cheaper term life insurance policies, are also tax-free payments.

Sorry whole life salesman, but this is not a unique tax benefit.

Tax-free growth

The cash value of your whole life policy is not taxed while it’s growing.  This is a good thing and similar to how retirement accounts work.

One problem with this is, you don’t control this money. 

Another is it’s growing a lot slower than it would be if you were invested in the stock market. 

If you invest your money in either an IRA, 401k, TSP or other type of retirement account, it will likely grow much faster, be under your control, and you will also have tax-free or tax deferred growth.

Bottom line here, retirement accounts are superior investments to whole life insurance.  

This isn’t an opinion.

It’s a fact. 

If you are foregoing investing in retirement accounts to stuff money into your whole life insurance policy, and pay that fat commission, you’re a sucker. 

God forbid they talk you into liquidating retirement accounts for this purpose.

I’m not making this up. There are shady salesmen out there doing exactly that.

I hope you understand the math behind this idea and how bad it is.

Whole life insurance salesmen are going to love you and buy a vacation home in the Bahamas off their commissions from you.

When is Whole Life Right for you?

One example when this investment can make sense is when you are responsible for a special needs adult who cannot earn money or take care of themselves. 

If they are going to permanently live with you, unable to take care of themselves, and could use an infusion of tax-free cash when you die, then this isn’t the worst thing in the world. 

I still think it’s better to invest the money yourself, and then just give them money as needed.

Another possible situation is you have already maxed all your retirement accounts, you have plenty of money in taxable accounts, significant real estate holdings, and you’ve still got lots of money you’d like to park somewhere.

I wish I had this problem!

Whole life will probably work out better than a savings account and should outpace inflation if you don’t mind paying a commission and being locked into life-long high payments.

Conclusion

Here are the characteristics of whole life policies laid out again.

• Guaranteed death benefit – Yes, but you don’t need a large death benefit in your twilight years.
• Level premium payments – Yes, they are level, but they are 10, even 20 times more expensive than a comparable term life policy that will fit most people’s needs.
• Guaranteed and assumed rate of return – These rates of return will beat savings accounts, and even keep up with inflation, but are nowhere near the returns you should be getting for long-term, even life-long investing.
• Cash value to borrow against – Sure, but I’d rather make much more investing it myself and have control of it.
• Tax advantaged growth – These advantages appear to be exaggerated. You’ll do better with traditional retirement accounts.

Whole Life insurance policies are pushed by salesmen as a great investment or tool for helping you achieve your financial goals.

Unfortunately, they often try to claim these are superior to standard retirement accounts and try to convince you to forego investing in TSPs, IRAs and 401ks in favor of these insurance policies.

In the most extreme cases where I call it a scam, they try to convince you to liquidate your retirement account holdings.

This is horrible advice. Choosing whole life over traditional retirement accounts will cost you millions over a lifetime.

It’s inappropriate for most people, especially the typical beginning or intermediate investor.

Outside of limited circumstances for higher earners with unique needs, this investment is not worth considering.

Don’t be a sucker.

Rich on Money

The post When Whole Life Insurance is a Scam appeared first on Rich on Money.

A reporter asked Mike Tyson if he was worried about Evander Holyfield and his “fight plan.”

He famously answered; “Everyone has a plan until they get punched in the mouth.”

Maybe you’ve got a great plan for your retirement portfolio. You saved up some money to fund your twilight years.

What if the stock market takes a huge, steamy dump just as your transition to retirement?

You just got punched in the mouth!

What can you do about that?

Disclaimer: I am not a certified financial planner. This post is a quick overview of complicated financial topics. You’ll have a better idea how to protect your portfolio and navigate withdrawing retirement funds after reading this. If you want a more thorough understanding of these issues, however, I recommend reading the source materials I’ve linked to and/or talking to a financial planner about your specific situation.

I believe in the 4% rule, and it’s my spending plan for retirement.

According to the Trinity study, you are safely able to withdraw 4% of your retirement portfolio each year with very low risk of ever running out of money.

The times where you could run out of money are fairly predictable.

It’s when large losses to your account occur in the first several years you are taking withdrawals.

You can greatly mitigate this problem and increase your chances of funding the rest of your life by practicing these two simple steps:

1. Lower volatility by gradually shifting to more conservative investments.
2. Adjust withdrawal amounts based on sequence of returns risk.

I’ll explain each of these thoroughly.

Lower Volatility as you Approach Withdrawing for Retirement

Most people, including me, invest in 100% stocks. When I say stocks, that includes mutual funds and index funds.

We often don’t have any fixed income (bonds and treasury bills) in our portfolio as a hedge against volatility.

For the thrift savings plan (TSP), this mean you are only invested in funds C, S, and I, and haven’t put any G or F (fixed income) funds in as a hedge.

This is not necessarily the wisest way to invest your money long-term.

While your portfolio has the most freedom to grow quickly invested 100% in stocks, it is also susceptible to sudden market drops.

This is particularly dangerous during the riskiest period for your portfolio, which is around the time you start withdrawing from your retirement accounts.

This is why it is wise to put a specific percentage of bonds or treasuries (fixed income) into your portfolio to lessen the volatility as you near retirement.

If your portfolio loses 50% of its value the year before you need it, you’re screwed.

Having a certain percentage of bonds in the portfolio would cause that 50% drop to be proportionally lower. The higher percentage of bonds, the less the drop.

Unfortunately, the converse is also true. When the market goes up 50%, depending on your concentration of bonds in the portfolio, it will grow less.

This might seem straightforward, but it’s a complicated balance to get right.

You need to worry about these two competing principles at the same time:

1. The need for safety and capital preservation.
2. The need for growth to hedge inflation over the rest of your life.

Here is some simple guidance for achieving that.

It can protect your nest egg as you approach the age you start withdrawing from your retirement accounts.

The Law of 100

It’s not really a law, but a widely accepted rule-of-thumb preached by financial planners going back several decades.

When it comes to the percentage of your portfolio that should be in stocks, you subtract your age from 100.

A 30-year-old would have 100 minus 30, or 70% of his/her portfolio in stocks.

However, people are living longer, and this amount of money ends up needing to last longer than in the past. Many advisors now suggest you subtract your age from 110 or even 120 in order to have a more aggressive portfolio longer.

I recommend choosing one of these three numbers, 100 (conservative), 110, or 120 (aggressive) based on your risk tolerance. Ask yourself these questions:

Do I have a higher or lower risk tolerance than other investors in my age group?

Is this my only source of income in retirement, or do I have a pension, real estate, or other income as a supplement?

For me as a retired military member with a pension, I’m comfortable using 120 for my calculation.

If you are doing this in a retirement account, you can rebalance to the new percentage each year using this rule without creating a taxable event.

This is a manual method to do what target date funds, or Lifecycle (L) funds in the case of the TSP, do for you automatically.

Target date funds periodically adjust to more conservative holdings as you approach your targeted year. In the case of the TSP, this happens quarterly.

But for do-it-yourself investors like me, I want control over what’s in my fund, and exactly how and when it’s balanced.

This is how you lower volatility using fixed income (bonds or treasuries). You can easily buy these in mutual funds or ETFs at almost any investment firm.

My favorite investment firms are Vanguard, Fidelity, and Schwab.

If you are a military/federal employee, you can buy these funds in the TSP through the G (treasury) or F (bond) funds.

Sequence of Returns Risk Defined

You know how to adjust your portfolio appropriately as you approach withdrawing money for retirement.

This will drastically aid your ability to fund the remainder of your life.

But…

You still need to watch out for sequence of returns risk.

Sequence of returns risk can either hurt you or help you, depending on when it happens.

It can mean the difference between running out of money half-way through retirement, or ending up with 8 times the money you started with.

If you understand it, you’ll be able to adjust your withdrawals correctly and either avoid ruin or take advantage of prosperity.

During your retirement years, if a large amount of negative returns years occur when you begin withdrawing, it will have a lasting negative effect and could drastically reduce the amount available to you. Your portfolio could run out before you do.

Conversely, if a high amount of positive returns occurs at the beginning of your withdrawal years, the opposite can happen. Sticking to the 4% rule in this case, you will end up with much more money than you needed.

How long a portfolio can last in retirement when taking withdrawals has much more to do with the sequence, or order, that returns occur as opposed to the annual average rate of return.

You can end up with far more money than you anticipated. This is due to the critical importance of the sequence of returns in the first few years of withdrawals.

This is what is known as sequence of returns risk.

Sequence of Returns without Withdrawals

This illustration shows how the order returns occur in (sequence of returns) without withdrawals doesn’t affect the end value of the portfolio.

In the case of Mr. Green and Mr. Brown, both started with a $1 million dollar portfolio and had on average 6% returns over the next 25 years.

The order that these returns happened in are reversed for each person.

In this first example, no money is withdrawn and the funds simply grow on their own.

Mr. Green starts with three good years, and Mr. Brown with three bad years.

Source document

You’ll see that the sequence of investment returns has no bearing on the portfolio value in the end.

This is because no money was being taken out of the account while it compounded and grew.

Even though one account started with good returns, and the other started with bad, the result was still the same.

Only the average annual rate of return matters in the end, no matter what order it happened in.

Sequence of Returns with Withdrawals

Let’s see what happens in the same situation while both people take 5% distributions (withdrawals) from their accounts each year. Mr. Green starts these withdrawals in an up market.

Unfortunately for Mr. Brown, he starts his withdrawals in a down market and runs out of money before the 25-year point.

Source file

Mr. Green on the left ends up with 2 ½ times his original balance while taking out 5% of the balance per year the entire time. This is vastly aided by having up years at the beginning.

Mr. Brown on the right got screwed by the sequence of returns at the beginning of his withdrawal years. Those large reductions to his portfolio balance at the beginning in conjunction with making 5% withdrawals during that time caused a death spiral that was unrecoverable.

How do we avoid these two extreme scenarios?

One where we spent too much and ran out…

The other where we didn’t spend near as much as we could have…

The truth is, the 4% rule is remarkably conservative.

In a majority of historical scenarios, those who withdrawal 4% a year in retirement end up with significant amounts of unspent money in the end.

Of course, if you don’t have your money invested the right way, you’re in trouble regardless. Here’s how to choose the right allocation for you:

Click here for TSP Allocations:

Click here or IRA/401(k)/all others:

How to Avoid Running out of Money

It’s easy to recognize the situation where you are at risk of running out money before the end of your life.

If you have significant down years at the beginning of withdrawal phase, it may be time to throttle back a little. If you are clearly in a bear market, it’s time to withdraw less than the planned 4%.

At a minimum, adjust your withdrawal rate to 3% instead of 4%.

Continue to take less out as long as negative yearly return years continue.

Ideally, you find other ways to get income during those first few tough years. As down years persist, continue to tighten the belt and limit spending more than originally planned.

Taking out even less if possible would put you in a better future position.

Selling taxable investments, start a paying side hustle, or taking on full or part-time work are options for leaving your nest egg as intact as possible during this critical down period.

When you get two positive return years in a row, go back to the 4% rule and use the ratcheting method described in the next section to guide withdrawal increases when indicated.

How to Avoid Underspending – The Ratcheting Method

A far more likely problem while employing the 4% rule for income during retirement is that you will underspend and end up with too much money in your portfolio.

This isn’t a bad problem to have.

You can increase your spending when safe by using the ratcheted spending model as described in Michael Kitces blog post on sequence of returns risk.

I’m going to give a brief overview of his detailed article on this.

A simple way to determine if a higher withdrawal rate is feasible is to increase spending by 10% once the account balance has grown 50% above its initial amount.

For a retiree with $1,000,000, this happens when the balance reaches $1.5M.

In this case, you ratchet up withdrawals 10%.

To avoid ratcheting up too quickly and overspending, only do this every 3 years at most.

This will allow you to take advantage of sequence of returns risk happening in your favor, which is actually far more common than it working against you.

Here is an example of how ratcheting would have worked following these rules over 3 different time frames. In this case, the time frames start in 1966, 1973, and 1982.

Source document: Kitces Blog

In 1966, because of poor returns at the outset of withdrawals, no up ratcheting occurs. This is essentially the flat line you see across the bottom.

The 4% rule was, however, sustainable during the entire timeframe.

In 1973, it wasn’t until halfway through retirement that the first spending increase was indicated. Three more happened after that.

In 1982 we hit one of most favorable sequence of returns risk time periods.

The ratcheting up of spending by 10% each time occurred on 9 different occasions.

Ratcheting up occurs at least once, if not multiple times, in almost all historical scenarios.

In summary, there are two things you need to do to make sure your money lasts as long as you do:

1. Make sure you gradually shift your portfolio to a heavier mix of fixed income (treasuries and bonds) as you approach withdrawing.
2. Adjust your withdrawal rate based on the sequence of returns at the beginning.

You know how to adjust your withdrawals for retirement now.

Let’s zoom out a little and make sure you understand the big picture:

Let me know where your investments are and how you will be applying this information to your finances.

Rich on Money

The post How to Survive the Next Market Crash appeared first on Rich on Money.

I came to visit Doug Nordman (The Military Guide), who after 20 years in the Navy, now spends his time surfing and writing about military personal finance (in that order).

I just hit 20 years in the military myself, and like he did, designed a life where I’ll now pursue my interests instead of being tied to a desk.

We’re not the only people doing this.

We are part of a growing community focused on the best way to achieve financial independence earlier than most.

This is an order of operations checklist. There are reasons why you should do things in this order. It’s optimized.

It will help you achieve your personal finance goals faster and easier than we did.

Get my FREE 2-page PDF cheat sheet on the 7 steps to optimal investing in the military.

Get the Match in your TSP/401k.

The very first thing you do with your money, even before you start paying off debt, is contribute enough money to your TSP or 401k to get the free match that is offered.

This only applies if you have matching available in your TSP or 401(k).

If matching is not offered, skip this step.

The reason for taking matching in the TSP first is simple. 

It’s free money.

You don’t want to miss it.

It is a much higher return on investment (ROI) than paying off debt.

In the case of the TSP, if you contribute 5%, the government gives you a match of 5%.

This money essentially gets doubled.  That’s why it’s first on our list!

For military, this matching only applies to those who are in the blended retirement system (BRS).

The BRS is the new retirement system for active duty with TSP matching that did not previously exist.

If you joined the service between January 1, 2006 and Jan 1, 2018, you had the ability to refuse or opt into the BRS.

For those who joined after Jan 1, 2018, you were automatically signed up for the BRS.

If you fall under the legacy retirement system, and not the BRS, you have no matching in your TSP. 

In that case, you do not contribute any money to your TSP until step 5.

Emergency Fund – One Month of Expenses

The emergency fund is often a controversial step in a checklist like this.

Some say you don’t need it if you have access to a credit card, Roth IRA contributions, or even normal investments like stocks or a mutual fund.

Others argue having 6 months of expenses in cash is mandatory.  The Dave Ramsey cult followers want to be ready for a zombie apocalypse. 

While I joke about my good buddy Dave, things like global pandemics and Capitol riots can remind us of the wisdom behind this conservative practice.

In the military, you are going to be fine if you have a month’s spending in cash.

There is a decent amount of security in this job.  It’s not common we get surprised with layoffs.

The most common issues we run into are things like surprise car or home expenses, problems with pay that take a month or so to resolve, needing to go to a funeral (sometimes the military covers this), etc.

If you needed help beyond the one month of funds, there are several avenues. 

• Go through the military.  There are a number of organizations that can help in crisis.
• You can pull Roth IRA contributions out penalty-free after it’s been open for 5 years.
• When you move to a new assignment, you can take an advance on your paycheck to cover your expenses.  I’ve seen people get 2 or 3 times their pay for this.
• Use a credit card for emergencies.
• Sell stocks or a mutual funds in a brokerage account

Pay off Consumer Debt

The next step on this list is an important one on the road to riches.

It is getting rid of your consumer debt.

I consider this everything besides student loans and your primary residence.

Bonus points for paying those off, but not necessary.

Let’s become debt-free and stay there.

There are two popular debt payoff methods; debt snowball and debt avalanche.

I recommend the debt snowball over the debt avalanche method.

Debt Snowball

The debt snowball method is where you list all of your debt balances, make minimum payments on them, and throw all leftover money at the smallest loan first. 

This appeals to our human psychology.  We get motivation and satisfaction from seeing debts eliminated quickly. 

Debt Avalanche

The debt avalanche method is where we list all debt by interest rate, make minimum payments on all of them, and throw all leftover money at the loan with the highest interest rate. 

This method is the most logically appealing. 

It makes the most financial sense, as you will save money by eliminating more expensive debt first.

You’re going to be fine with either of these methods.  I just think psychology is a powerful thing when it comes to money. That is why I’m partial to and recommend the debt snowball.

I wish common sense guided most of our money decisions, but that’s rarely the case.

Invest the Max into your Roth IRA

Your matching is taken care of, emergency fund established, and got rid of debt.

No small feat.

The first account to invest in is your Roth IRA.

This account comes before your 401(k) or TSP for a number of reasons:

• Once a Roth IRA has been open for 5 years, you are able to withdraw the contributions (but not the growth) penalty free before age 59 1/2.  Not possible in other retirement accounts.
• The TSPs investment choices are extremely limited.  Just the G, F, C, S, I, and Lifecycle funds.
• TSP has more limitations on withdrawals than IRAs.
• Military members have a lower tax burden while on active duty because certain parts of pay, like housing, food, and base pay during deployment, is not taxed.   

These tidbits makes the Roth IRA an attractive choice.

Dave Ramsey suggests putting 15% into your retirement accounts. 

It’s not enough, Dave.

I’ve been meaning to talk to him about that.

You will not reach financial independence quickly, or possibly at all, if you only contribute 15% of your pay to retirement accounts.

I’m a strong believer in maxing your IRA and TSP each year.

The max for an IRA in 2021 is $6,000 a year.

If you make too much money, you may not be eligible to contribute to a Roth IRA.  The cutoff for 2021 is $125,000 modified adjusted gross income (MAGI) for single filers, $198,000 for joint filers. 

If you have a high income and still want to take advantage of a Roth IRA, consider a back-door Roth.  This is a little complicated.

Maxing isn’t easy to do, especially at first, but you will thank yourself (and me ) the earlier you start doing this! 

This harnesses the magic of compound interest on top of the advantages of tax savings in retirement accountants. 

It’s a double-whammy.

Now let’s quickly address the Traditional vs Roth retirement account choices you make in your IRA/TSP/401(k).

Get my FREE 2-page PDF cheat sheet on the 7 steps to optimal investing in the military.

Traditional

A traditional retirement account is where you can deduct that amount of money from your taxable income in the year you contribute. 

This also means that in retirement when you withdraw the money, that is all considered taxable income.  This is an attractive option if you believe your tax rate may be higher now than in your retirement years.

Roth

A Roth retirement account is sort or the opposite when it comes to tax treatment.

With a Roth, you do not deduct your contribution amount in the tax year you make it. That money is taxed as normal in the year you contribute.

This means when you withdraw the money after age 59 1/2, you don’t pay tax on any of it!  This is attractive if you believe you may be in a higher tax bracket in your retirement years. 

This ends up being true for many military members because of:

• An increased chance of being in a higher tax bracket after leaving the military because they may receive a pension after retirement
• A portion of their income in the military was not taxed before retirement, reducing their effective tax rate

As far as how to invest, that’s too large a subject to get deep into here.

I believe the best method is picking a simple investing strategy using index or mutual funds and sticking with it over the long-term. 

Don’t jump in and out of different investments based on what you hear at the water cooler.

I go much more in depth on how to invest in the following post:

Invest the Max into your Roth TSP/401(k)

I talked earlier about some of the advantages of investing in a Roth IRA before the Roth TSP. 

Those are compelling arguments, but if you had some strong preference to do TSP before IRA, so be it.

Your still better off than 99% of military members if you end up maxing both in any order!

If I had to pinpoint my biggest financial mistake, it would be not contributing the max to retirement accounts earlier in my career.

The yearly contribution maximum for TSPs or 401(k)s is quite a bit higher than an IRA.  It’s $19,500 in 2021.

While Roth IRAs have an income limit, Roth TSPs do not, so definitely take advantage of this.

You’ll notice I mentioned to contribute to a Roth TSP or Roth 401(k) instead of traditional accounts.

As I outlined above, Roth could end up being a better choice for military members for a number of reasons, including having a lower effective tax rate than non-military earners.

 A Roth TSP or 401(k) can be great for those that earn too much to contribute to a Roth IRA.  There is no income limit for Roth TSP or 401(k).

Investing in the TSP can be confusing because what is offered is totally different than what other financial institutions offer.

They have funds that are letters.  Each fund corresponds with a similar fund available through typical investment firms.  Here’s a chart:

• G Fund – Investment in U.S. Treasuries
• F Fund – Mimics Bloomberg Barclays US. Aggregate Bond Index
• C Fund – Mimics S&P 500 Index
• S Fund -Mimics U.S. Completion Total Stock Market Index (small and medium U.S. companies not included in the S&P 500 Index
• I Fund – International Fund focused on larger developed economies
• Lifecycle Funds – A tailored mix of G, F, C, S, and I funds that slowly adjusts to more conservative over time

For most of my career, I invested simply in the S&P 500 index.  I currently invest in a 50/50 split between the C fund and S fund. 

There aren’t tons of choices for how to invest in the TSP, but I’ve compiled a list of several of the best methods.  Some were recommended from top money gurus. 

Open a Taxable Brokerage Account

Once you’ve knocked out debt and taken advantage of tax-advantaged retirement accounts to the max, it’s time to start putting money in a “normal” or taxable brokerage account.

These accounts are different than retirement accounts in two important ways.

• You can put in and take out as much money as you want anytime and at any age
• The money made in these accounts is taxable income.

These accounts, just like IRAs, will allow you to have most typical investments inside such as stocks, mutual fund, exchange traded funds (ETF), and many others. 

You should also invest in these accounts using a long-term buy-and-hold strategy.  Pick something that makes sense to you and stick with it long term. 

Here is a great article on more than 150 different methods for investing in your brokerage accounts, IRAs, or 401(k)s.

Invest in Real Estate – Optional

I primarily invested in real estate outside of my retirement accounts (IRA, TSP/401(k)).

I recommend investing in real estate as a road to riches, but it must be done correctly and responsibly.

The reason I say it’s optional is because using long term buy and hold index fund investing with a historic long term payout of between 7-10% is already enough growth to make you rich.

Not to mention it’s zero work.

Real estate is more work, more of a learning curve, and more risk, but you just might outperform your other investments.

There is a part of real estate for military members that is mandatory.

That part is not making the two deadly real estate mistakes I see military members make all the freaking time.

If you make these mistakes, they can slow you down or even stop you from reaching your eventual goal of being rich in the military and having financial independence. 

Those two huge mistakes are:

1. Don’t buy homes in high cost of living areas
2. Don’t buy a home at every duty station.

The most important advice I’ll give for real estate in the military is this:

Don’t buy a home in the military unless it will cash flow well as a rental property when you leave.

I get into more specifics about real estate in the military in the following article:

There it is.

Follow these 7 steps and you will become Rich on Money and Rich in the Military.

Rich on Money

The post How to Get Rich in the Military appeared first on Rich on Money.

The concept of checking my net worth and monitoring my finances closely was key in building a large portfolio before 40 years old capable of supporting my family without ever working again.

• Checking net worth often is a bad idea, right?  Wrong.  It reminds you to make smart financial decisions.
• A Forbes study showed 80% of people with goals to save money give up in the first month.
• The habit of tracking your net worth will drastically improve the amount of money you invest each year.
• Lack of attention to net worth makes it easy to justify spending that derails your financial goals.

The Power of Tracking your Net Worth

The simple act of signing up for a FREE Personal Capital account to track your net worth will drastically improve your financial situation

• Totally FREE – No credit card info needs to be provided
• No contract or obligation of any kind

What is Personal Capital

• An online financial advisor with several free tools that can help you analyze your investments and grow your net worth.
• If you have financial accounts totaling over $100k, they’ll ask you if you want to sign you up for fee-based personalized management.

If you let them know you’re not interested in this services, they stop asking, but you can still use their free tools and track all your accounts in one place.

Why I Use Personal Capital

My wife Eileen has been tracking our net worth on Excel spreadsheets for the last 20 years.

Tracking on Excel manually is a considerable pain-in-the-ass, but it helped us achieve our financial goals.

I tried using other services like Mint, Quickbooks, and even my bank (USAA) website to combine accounts, but they all sucked!

• Using Personal Capital is so much easier and more accurate than tracking finances ourselves.
• We realized that over our saving careers, attention to our net worth and financial goals fueled our success in finances.
• We are retired for good at 45, enjoying the fruits of our investments, and looking forward to the new opportunities in front of us.

Here’s what I love about Personal Capital:

• A U.S. based online financial advisor with $16 billion under management.
• Has FREE must-use tools such as net worth tracker, investment planner, fee analyzer, and budgeting tools.
• Quickly combines all financial accounts on one well-organized page
• Signing up is simple, fast, and FREE.
• Risk-free. No obligation, doesn’t ask for credit card info.

Ok Rich, I want to Track my Finances with these FREE tools.

Just click on the link above, give your email address and phone number, and combine all the information about your investments and assets conveniently on one secure site.

Dashboard with Net Worth

Here’s how the home page looks with net worth in the top left corner and all your cash, investment, and mortgage accounts listed on the left side:

Mobile App

The mobile app is even better looking than the website. It’s organized well, with an outstanding interface.

Signing Up

• Quickly sign up with an email address and phone number, and in 10 minutes easily set up all your external accounts.
• Instantly view net worth and all assets at your fingertips – access to various FREE Tools to take control of your finances.
• Tracking net worth and expenses drives the right kind of financial behaviors.
• Totally free, no contracts, no risk

Which Tools are Free

Net Worth Tracking

The function on Personal Capital I use the most is seeing all my assets including real estate in one place and tracking my net worth. It is up to the minute information on everything and even tracks real estate market values through a link to Zillow.

It also shows cash flow, expenses, and budgeting all on the same home page.

• Tracking net worth drives smart money decisions drastically improving your finances.
• Constant attention on your portfolio results in putting almost every dollar to work for you.
• Using the cash flow and budgeting tools encourages wise choices with each purchase you make. (or don’t make!)

Investing Tools

There are several ways to improve your finances when you see it all together in one place. I’ll discuss a few of these helpful tools:

Portfolio Allocation Analyzer

You can see graphically how your investments are allocated to different sectors and decide if you need to diversify. It is easy to notice if you are too concentrated in a certain area or lacing exposure to a specific sector.

U.S. Sector Analysis

Do the same thing as above. You can check your level of diversification within just the U.S. sector.

Cash Flow Analyzer

With this tool, you can create a budget and track income and expenses from all your accounts. From here, you can set financial goals like saving for retirement or paying off debt. The analyzer will help you make a solid plan to reach those goals.

Retirement Fee Analyzer 401(k)/IRA/TSP

With Personal Capital’s fee analyzer, you’ll see exactly how much you have spent in each account on fees. It’ll let you know how much it’s costing you, and you made decide to make some smart adjustments based on that info.

In my case, a lot of my stuff is in funds with a .04% fee. That’s low, and not worth stressing over. I was in more expensive investments before, but realized it and got into pretty much identical funds with much lower fees.

Budgeting

The Personal Capital budgeting section allows you set monthly spending targets and shows you how far over or under you are.

You can filter spending by merchant, date, or category.

Retirement Planner

They’ve got a detailed retirement planner that takes into account social security benefits, current net worth, projected children’s college expenses, and yearly spending goals in retirement.

It uses state-of-the-art algorithms to show the statistical chances of meeting your goals based on different future market projections. It will also help you create a saving and investing strategy to achieve those goals.

• Drastically reduce spending by harnessing the power of tracking your net worth regularly.
• Putting every dollar I can to work, and seeing your net worth is a constant reminder of your larger financial goals.

Yes Rich, I’d like to use these free tools to boost my net worth.

• Just click the green button, give your email address, phone number, pick a password, you’re in!
• No credit card info needed – no commitment

Personal Capital Wealth Management

Personal Capital gives us great free tools, but that’s not where they make their money.

They are hoping you’ll sign up for their wealth management services.

Personally, I just signed up to use their free services, and have no plans to use their wealth management division.  

Some people want help investing. Do what works for you.

Their services combine robo-advisor algorithms (investment advice done by a computer) with access to human financial advisors for a tailored approach to investment management.

Here is what you can expect when you sign up for their advisory services (from their website):

Their Philosophy on Personalized Asset Allocation

Their approach to asset allocation is driven by analysis as well as an understanding of your risk tolerance and goals.

This is an improvement over my two experiences having companies manage money for me (USAA and Bear Stearns).

In both cases, they didn’t take the time to understand my unique financial situation and their approach came off as cookie-cutter – not personalized.

Personal Capital explains below their more tailored approach:

They are fee-only, which I like. That means they aren’t incentivized to sell you overpriced or inappropriate financial products with fat commissions.

The fee structure is simple.

• You pay an annual flat fee of 0.89% for a portfolio between $100,000 (their minimum) and $1 million.
• Their fees get cheaper as your net worth goes up.
• There are no fees, trading fees, or commissions on top of this amount.
• All advising, buying, selling, and rebalancing is included.
• They include tax optimization.

Is Personal Capital Worth It?

It’s an impressive website and app with tons of free tools. I think giving up your email address and phone number for access to all of this is a smart move.

Pros:

• Many FREE tools that will encourage behavior to massively boost your Net Worth.
• Several tools that help cut expenses or eliminate unnecessary fees.
• Outstanding website layout and mobile application.

Cons:

• Management fees seem a little high.
• They will contact you about managing your money.

• Use Personal Capital’s FREE tools – it will help you boost net worth and cut expenses. You’ve got nothing to lose, and everything to gain.
• It’s seriously risk-free. There’s no obligation, no contract, no payment info entered. Try it.
• Click the button below to sign up. On the next page, enter an email address, phone number, and choose a password.

It’s that easy!

After you sign up, send me an email at rich@richonmoney.com. I will check in with you you after three months.

It’s worked great for me!

Rich on Money

P.S. I really do believe that tracking your net worth can skyrocket your financial growth. Sign up for Personal Capital risk-free now!

The post How Tracking Net Worth Will Make You Rich appeared first on Rich on Money.

BLUF:  I made a lot of money while I was in the military, gaining millionaire status well before my recent retirement at 20 years in. 

I’m visiting a friend in Hawaii right now. We have a lot in common.

He retired from the Navy 20 years ago.

I retired from the Air Force 5 months ago.

Like me, he retired financially independent and never worked again.

He spends his days surfing, hanging out with friends, and traveling.

What we did, anyone can do while they’re in the military.

We both had enough money saved up to never work again.

I’ll show you the exact steps we used to get rich in the military.

Getting rich in the military requires a different strategy than the average civilian. There are unique challenges we face for both how to invest and how to buy real estate.

Getting rich in the military can be boiled down to doing three things correctly:

1. Saving Money while in the Military
2. Investing while in the Military
3. Real Estate while in the Military

I’ll talk through the specifics of each step then reveal at the end which one is by far the most important.

Let’s dig into this.

1.  Saving Money while In the Military

The secret to saving money in the military is to grow the gap.

What the hell does that mean?

Growing the gap simply means expanding the distance between how much you spend and how much you earn.

Those are only two ways I’m aware of to get extra money.  You can:

SPEND LESS

or

MAKE MORE

The bigger the gap between these two things, the more money you have to invest each month.

Let’s talk about both individually.

The first half of growing the gap is:

Spend Less

Our society is built around consumption.

We LOVE buying things.

If you can find a way to avoid unnecessary spending early in your career, you’ll be able to buy whatever you want later in your career.

Being careful with money until you’re out of debt and have built up a decent net worth is the first key to getting rich. 

This is all about reducing expenses.

The two categories for saving money that give you the biggest bang for the buck for reducing expenses are housing and vehicles. 

Most people waste absurd amounts of money on these two things.

Tackle these two things first. Live in the cheapest house you can. If buying a house doesn’t make financial sense, rent. (we’ll talk more about this later).

Don’t buy new or fancy cars. Pay cash or have low payments on reasonable used cars that will last a long time.

Knock out these two biggies first, then trim the fat on vacations, eating out, furniture, iPhones, clothes, etc.

If you want to go deeper on this subject, read the following article I wrote a few years ago that was picked up by Business Insider.  (They changed the title for some reason).

Make More

The unfortunate truth about expenses is that you can only cut so far. 

You can’t cut beyond zero. 

When you get close to zero, life isn’t much fun.

You can only be so cheap with furniture, clothes and food.  

You’ll find yourself living in a small empty room sleeping on the floor eating top ramen.

There is a limit to how much you can trim expenses, but there is no limit to how much you can increase your income.

Read that sentence again.

This is important in the military. 

We aren’t known for high salaries.  Enlisted also make less than officers.

The solution here is to start a side hustle, side business, part-time job, small business, etc. 

If you have a significant other, they need to do the same.

If you google how to start a side hustle, you’ll get 1000’s of articles on that. 

My point is, you just got to do it.

I flipped houses for extra income while in the military.

Figure out what will work for you. 

I love the military, but it’s just not enough money alone to build significant wealth.

My wife and I both took several extra jobs while I was in college to pay off my student loans quickly.

Grow the gap between what you spend and what you earn.

Then invest the gap.

That is what is addressed in the next two steps.

2.  Investing While in the Military

After you grow the gap, the next secret to getting rich in the military is to contribute correctly to your Thrift Savings Plan (TSP)  and IRA. 

Most people don’t understand the difference between the two and/or don’t contribute to both.

 Before I explain this, let’s make sure you understand the smartest way to invest.

Investing is insanely easy, but we screw it up by thinking we or someone we know can beat the stock market.

Index Fund Investing

People on wall street have a benchmark they need to beat to be successful investors. 

It’s beating the S&P 500 index, which is essentially a list of the 500 largest publicly traded companies.

The amount of hedge fund managers, investment planners, and stock broker cool kids that beat the S&P 500 index over periods longer than 10 years is microscopic. 

Over 20 years, virtually non-existent.

People spend absurd amounts of money paying others to invest for them, only to get beaten by a stock market index over the long term.

A stock market index they could have invested in for free.

If the experts can’t do it, don’t think you can!

Warren Buffett is probably the best investor in the world.  He’s previously held the title of richest man in the world, and is always near the top of the list. 

While he is one of the very few people who have beaten the S&P 500 index over the long term, even he doesn’t recommend trying.

In fact, when he passes away, he’s investing his family’s inheritance in the S&P 500 index instead of his own company’s stock.

That should tell you something.

Here are several things I see investors try to do, but eventually screw up:

• buying and selling stocks based on news, newsletters, hype, tips
• day trading after taking a course or reading a book
• investing in bitcoin or other unproven, over-hyped fads
• trying to sell when market drops and buy back in lower

If you see others do this, rest assured they will eventually lose a lot of money.

You will too.

Key point for wealth:

Investing your money in the S&P 500 index, or the TSP equivalent “C” fund and leaving it for the long-term will beat 98% of professional investors in the world.

It will definitely beat all those losers and shisters (word?) on social media claiming they can pick winners or have a secret formula.

Investing in the S&P 500 index and leaving it is what I’ve done since I was 25 year old. 

I took Warren’s advice, and it didn’t disappoint. 

Timing the Market

Here is the secret to avoiding large drops in the market.

Don’t try.  You’ll screw it up.

The advice I gave about index fund investing is useless if you are jumping in and out of investing every time you or somebody you know gets nervous about the market.

Selling your investments because of pandemics, elections, wars, bad news, market or real estate cycles, etc. is a recipe for low returns.   It doesn’t work over the long term, even if you get it right once in a while.

Two recent examples of this would be people that got out of their investments when Trump won the election in 2016, and people that panicked and sold when the pandemic started in March 2020. 

In both cases, the stock market continued a relentless upward trend, and people missed out on large gains.

I’ll keep this key point for wealth simple:

Don’t try to time the market. 

Roth vs. Traditional Retirement Accounts

In your TSP/401k as well as your IRA, you’ll have a choice of what type of account between Traditional or Roth you want to set up.

This affects the type of tax advantages you’ll get in these accounts.

Traditional retirement accounts mean you can deduct the amount you contribute from your taxable income that year. 

Roth accounts are funded with money that has already been taxed and you don’t deduct it from taxable income for the year you contributed.  When this money is withdrawn once eligible, none of it is taxed as income.

There is a lot of debate as to which is more suitable for a military member. 

I believe that both of them are great, and it’s difficult to be certain which one will work out better for you in the long run.

Generically speaking, if you believe you’ll have less taxable income in retirement then in your working life, you may be better off with traditional retirement accounts.

If you believe you may have more taxable income in retirement than you did throughout your working years, a Roth might be the best.

Investment Order of Operations:

Contributing the maximum to retirement accounts is KEY in building significant wealth in the military.

This is done by contributing to both your IRA and TSP every year.

You are allowed to contribute the max to both.  It’s not one or the other.

If you have a spouse, they can contribute the max to their IRA whether or not they are working.

Sometimes it’s confusing to know which accounts to fund first.  This should help…

There is an optimal order to invest your funds in.

1. If you have TSP matching, invest 5% of your pay to the TSP.  This is free money you don’t want to miss!  With no matching in your TSP, start at the next step.
2. Max your IRA contribution (and your spouse).
3. Max your TSP contribution.

While I do believe in paying off consumer debt before steps 2 and 3, these are all things that should be done BEFORE investing in real estate and BEFORE investing in non-retirement accounts.

Why this order?

While TSP’s have a much higher contribution maximum ($19,500 in 2021 vs. IRA $6,000), the investment options and withdrawal rules are more restrictive than IRAs.

Additionally, people used to say the TSP had the lowest expense ratios. 

This is no longer the case. 

You can get just as good or better expense ratios at Vanguard, Fidelity, or Charles Schwab. 

The fees are so low with the TSP as well as these three companies that they aren’t even really worth arguing about.

TSP Investing

The Thrift Savings Plan (TSP) is the federal equivalent of a 401k plan.  It’s a retirement account for military and federal employees.

It is different than an IRA and you are allowed to contribute the max to both of these each year.

The TSP is the most important investment you’ll make in your path to wealth because it has a higher yearly contribution limit than IRAs  ($19,500 TSP vs. $6,000 IRA in 2021) and it’s tax advantaged.

There are several funds offered by the TSP that are roughly equivalent to mutual fund indexes offered by traditional investment companies.

• G Fund – Investment in U.S. Treasuries
• F Fund – Mimics Bloomberg Barclays US. Aggregate Bond Index
• C Fund – Mimics S&P 500 Index
• S Fund -Mimics U.S. Completion Total Stock Market Index (small and medium U.S. companies not included in the S&P 500 Index
• I Fund – International Fund focused on larger developed economies
• Lifecycle Funds – A tailored mix of G, F, C, S, and I funds that slowly adjusts to more conservative over time

Everything you Need to Know about the TSP

While there are a number of ways you could invest in the TSP, I’ll use a simple and effective method as an example.  It’s the one I used. 

100% in the C fund.

This is the equivalent of investing in the S&P 500 index, which is what I talked about earlier and has been my investment strategy.

Investing all your money in the C fund throughout your career and not touching until you reach the age where you can withdraw penalty free (59 ½ years old) is a great way to start your quest to being rich in the military.

It is widely accepted that the S&P 500 index has made on average a 7-9% return over the long run.  I’ll use a 7% average for this model.

Here’s an example of investing $1,000 a month in retirement accounts and what you’ll end up with after 30 years. 

Keep in mind, investing $1,000 a month is only half of what you’re allowed to invest through retirement accounts (TSP and IRA together).

As you can see, you’ll end up with $1.2M and change in 30 years, and it grows a lot faster as time passes. 

Imagine if you invested $2,000 a month!

You don’t have to imagine, it’s double ($2.4M).

What if your spouse did the same thing as you.  Double again ($4.8M).

The Power of Early Contributions

Some more investing wisdom. 

While I realize it’s hardest to contribute the max early in your career, those early contributions make far more money than the money you contribute later in your career (when it’s much easier).  

This is because of the importance of time on compound interest growth. 

Let’s take for example $2,000 you invest in the first year of a 30-year career.

Compounding at 7%, that initial $2,000 alone grows to $16,237.

That’s the result of 30 years of compound growth.

$2,000 invested at 20 years into your career only ends up being $4,020 at the end of a 30-year career.

That’s how much less you get with 10 years of compound growth. 20 years less than the example above.

Big Difference.

So while investing money early in your career is harder to do, in this case it grew 4X faster than the money contributed 20 years later. 

Don’t miss out on that compound growth!

While I used 100% C fund in my example, there are a number of well-researched ways to invest in the TSP. 

Just remember to pick a strategy and stick with it for the long term.

Jumping around and changing strategies often will lose you money.

IRA Investments

As I said earlier, everyone is able to contribute the max to both their TSP (or 401k) AND their IRA.  Spouses can also contribute to their own IRAs whether they work or not.

Fully funding your IRA is easier than with TSP because there is a lower contribution limit ($6,000 for IRA vs. $19,500 for TSP in 2021).  Everybody should find a way to fully fund this from day 1 one on the job.

Remember to harness the power of early contributions.

I started investing in 1999, and haven’t missed a year.   This was key for me getting rich in the military.

An easy strategy to invest in IRAs is following Warren Buffett’s advice and put it all in the S&P 500 index fund.

Warren Buffett gives up on Beating S&P 500 Index

That is exactly what I did.

There are also several well-researched alternatives to this.  The key is not to jump back and forth between strategies or jump in and out of the market when you are scared.  This will ruin your returns.

Investing in the S&P 500 index fund seem too simplistic for you?

Here is a post that lists several well-researched investment strategies and explanations:

Brokerage Account

When you’ve maxed out your TSP and IRA, then it is smart to invest money elsewhere.  The easiest and most straightforward choice is to put index funds in a brokerage account.

This is different from a TSP or IRA.  This account is outside of retirement accounts, and there are no tax advantages to investing in them.  There are also no contribution limits.

When you sell index funds, stocks, or do anything that earns money in a brokerage account, the profit that you’ve made is taxed as a capital gain.

It’s smart to have money in a brokerage account because you cannot access the money invested in retirement accounts before age 59 ½ without penalties.  There are some exceptions to this, but it’s not worth going into here.

It will typically be easiest to have your brokerage account (non-retirement investment  account) at the same company as your IRA. (Charles Schwab, Fidelity, or Vanguard)

You can and should invest in this account with the same rules discussed earlier.  Notably:

• Don’t time the market
• Stick to a strategy long-term
• Don’t make short term trades

Many use the same investment strategy in this account as their IRA account. 

While investing in a brokerage account after an IRA and TSP are maxed is the smartest and easiest move, real estate investing is also an option. 

The preference at this point should be which one you are more comfortable with, and you can do both.

I did.

Real estate investing was another key part of me getting rich in the military.

3.  Real Estate Investing

Has anyone ever heard the easiest way to get rich in the military is buy a house at every duty station and then make it a rental when you leave.

I got news for ya!

Nothing could be further from the truth.

Most that try this route realize they have made mediocre to poor investments.

If you do this, most of the properties you buy will have a negative cash flow every month.

I tried this myself and later regretted it.

Here is the key to doing real estate right in the military:

Don’t buy a house unless it will cash flow well as a rental property.

This will make a little more sense if you understand the 1% rule in real estate.

The 1% Rule:  If a property will rent for at least 1% of its price, then it will probably be a good investment.

If you buy a house for $100,000, and you would be able to rent it out for $1,000 a month or more, you would satisfy the 1% rule.

To better understanding calculating cash flow on a rental property, read How Much Money will I Make on my Rental Property*********

Another important thing to understand is that expenses on rental properties are much higher than you believe. 

The 50% rule in real estate, 50% of collected rents actually go to expenses.

That doesn’t include mortgage!

So when a military member buys a house in San Diego, lives there two years, and then rents it out for $2,400 a month with a $2,200 mortgage payment, he is not cash flowing $200 a month.

If 50% of rent is expenses ($2,400 X 50% = $1,200)

That is a negative cash flow of $1,000 every damn month.

Maybe 50% expenses is a little high (it includes property management), but even with 30% expenses, which is definitely low, you are still losing a lot of money!

Once you understand the 1% rule and the 50% rule, you’ll see houses in high cost of living areas almost always make poor rental properties. 

The big lesson here is don’t buy a property unless you’ve done the math and you know it will make a good rental property when you move away.

If you can’t make the numbers work, it makes more financial sense to rent in these locations, or live on base, and save money to invest elsewhere. 

That might be in a brokerage account, or in a rental property that will actually make money.

You’ve probably heard that renting is throwing money away. 

Yeah Rich on Money!  Who wants to pay off someone’s else’s mortgage?!

It’s not that simple.

The transaction costs of buying and selling a home combined with future negative cash flows and high expenses make renting more economical than buying in many cases.

I only bought real estate when it was a smart money decision.

I used real estate to accelerate my financial journey, but it’s not for everyone.

To understand more about real estate investing in the military, check out:

Which Step is the Most Important

I talked about the three concepts you must master to get rich in the military.

1. Saving Money while in the Military
2. Investing while in the Military
3. Real Estate while in the Military

The first step is saving money while in the military.  I also explained this as growing the gap between what you spend and what you earn.

The next two steps were investing and real estate while in the military.  Both of these are examples of how to invest the gap.

Which one of these three steps is the most important?

Saving your money or growing the gap is the most important and the secret to wealth in the military.

Without this step, you won’t have enough money to make a difference in investing or real estate.

It’s about investing early and often, and relying on the magic of compound growth.

Once you’ve got this extra money, you need to make sure to invest it right by following steps two and three.

Let me know what you think the most important step is for becoming rich in the military.

Let me know if the comments. I need to get back to surfing.

Rich on Money

Check this post out!

The post 3 Secrets to Get Rich in the Military appeared first on Rich on Money.

Don’t be the investor who believes the rental expenses he’s given from the property seller!

Intro to Estimating Rental Expenses

I will give you formulas and methods to make accurate estimates even if you don’t have someone local in the area you can compare notes with.

There are several different methods for doing this. I’ll let you know which work best.

The ideal situation for accurately estimating expenses is to get the information directly from another investor that has rentals in the same area as you. 

You can find these people through local clubs like a real estate investing association (REIA) or other investing group.  Often these groups are on Facebook. You can find by searching key terms such as REIA or real estate investing and the name of your city.

If you can’t find investors that will help, talking to property managers is the next best thing.

Whether you get information from these people or not, it is still a good idea to use the tools here to make sure their rental estimates make sense.

Maintenance and Repairs

Maintenance and repairs are variable costs. These are difficult to predict and change often.

There are several “rules of thumb” that can help you estimate what repairs will be.  I’m gonna break them all down for you, and tell you my favorite:

• The 1% Rule for Expenses
• The Square Footage Formula
• The 5X Rule
• The 5% Rule
• The 50% Rule

Repairs are the most underestimated and neglected rental expenses in real estate investing.

Here are the rules to help estimate them:

1% Rule for Expenses

Don’t confuse this 1% rule with the more common 1% rule for rent. (Rents should be at least 1% of purchase price)

1% Rule for Expenses Definition: Maintenance and repairs will cost about 1% of the property value per year. 

A property valued at $100,000 should cost $1,000 a year for repairs on average.

Pros: Easy to do in your head. Accounts for higher prices in high cost of living areas. Labor and supplies cost more in these area.

Cons: Not accurate on older properties under $100,000

I can tell you from personal experience owning 30 properties with an average cost of $75,000 each, this isn’t accurate at the low end of home prices.  

Often when you find a property that cash flows well under $100,000, it is going to be a bit older and comparatively in worse condition.  These two traits make repair prices higher. 

From my experience, a 1.5% calculation off purchase price would be more accurate for run down properties purchased under $100,000.

Square Footage Formula

Plan on $1 per square foot for yearly maintenance costs.

A 1,000 sq ft home should cost about $1,000 in maintenance per year

Pros: More conservative than 1% rule above. Makes sense that larger homes have more costs due to increased area.

Cons: Does not accurately account for cost of living differences.

My average costs for repairs in Montgomery, AL are a lot lower than those in high cost of living areas (HCOL) like San Diego or Honolulu. This rule doesn’t account for those differences on the same size house.

Labor and supplies will cost more in high cost of living areas.  To estimate rental expenses, adjust as needed.

5x Rule

Yearly maintenance costs will be approximately 1.5 times the monthly rental rate.

If your home rents for $1,000 a month, the estimate should be about $1,500 a year.

I’m not sure why it’s called the 5x Rule, but that’s how its described in several different places.

Pros: Rent prices tend to correlate with age, condition, and desirability of neighborhood

This rule is actually not widely used compared to the rest, but I find it the most useful because of its flexibility.

Cons: No rule is perfect, but this one is pretty good.

5% Rule

You should expect to spend 5% of your total income (total rents) on repairs and property maintenance.

$100,000 property rents for $1,000/mo X 12 months

$12,000 a year x 5% = $600 a year budget for repair expenses

Pros: Easy to calculate. Half of ten percent. You can do it in your head.

None. 

Cons: Estimates come out too low.

While this a fairly well-known rule, I find it to be an unusually low estimate.

First, this is out of line with the 5x Rule, which states expenses will be 1.5 times monthly rent.  I felt the 5x rule was the best estimate so far.  If you do the math, that rule works out to 12.5% of total income on repairs. 

The 5% rule here is way too low. 

Not even half the estimate of the 5x rule.

Unless your property is close to new and in excellent repair, 5% expenses would be unlikely in reality.

That being said, I often see pro formas (estimate of expenses) on turnkey real estate or on other promotional literature about real estate investing that claim a 5% maintenance estimate.

To add insult to injury, they often don’t include an estimated expense for capital expenditures, which means the 5% is meant to cover both.

This it why uniformed investors lose money on rental properties they buy.

50% Rule

Total operating costs will equal approximately 50% –  or half  – of your yearly rental property income.

This is probably the most popular formula for expenses, but it applies to all rental expenses, not just repairs and maintenance. 

The 50% rule also applies to capital expenditures, property management,  taxes, insurance, vacancy, and all other operating expenses.

 Since property management is included, if you self-manage, you could probably use 40% as your rule, although the value of using your own time for management is worth something.

See a more in-depth explanation of the 50% Rule.

Variables

The estimates you get from these rules may need to be adjusted based on the following criteria:

• age of the property
• condition of the property
• amount of turnover/crime in the area
• cost of living

You should consider how much your prospective property differs from the average property.  If yours is much older or in a much higher crime area, you should consider raising the estimates for your rental expenses to make up for the increased likelihood of higher expenses.

I believe the best formula is the 5x rule (1.5 x monthly rent). It can account for these variables better than the rest, and it’s conservative enough to keep you out of trouble.

To accurately estimate your expenses, you need to know the difference between maintenance/repairs and capital expenditures.

Capital expenditures are a separate category from maintenance/repairs. You need estimates for both.

Both are treated differently for taxes.  Maintenance/repairs are deductible as expenses in the year you make them.  They are the typical things you do because things break or wear out.

Capital expenditures are things like replacing major systems (roof, windows, HVAC) as well as doing renovations. They are depreciated over time, like a house or building is.

Capital Expenditures

We need a way to estimate a yearly budget for capital expenditures (Capex) on our property.

I’ve attached a spreadsheet below that shows the best way to do this. 

Here are the steps for using it:

1. List each capital expenditure and cost.
2. Estimate lifespan and current age. 
3. Subtract current age from lifespan to get remaining life.
4. Divide cost by remaining life for annual budget amount.
5. Combine all totals for yearly Capex budget amount.

This is a sample. You’ll have to decide which Capex items to budget for. Every situation will be different.

If you don’t think you will replace certain items, like the driveway or cabinets during the time you own the property,  leave it out of the calculation.

The total you get in the annual budget column is your capital expenditures budget.  It’s money you don’t spend every year.  You save it for when that large expense comes.

Here is a screenshot from the IRS publication on residential real estate showing examples of capital expenditures (improvements):

Since these are not considered routine maintenance, and will benefit the property for many years, you cannot deduct the entire dollar amount in the current tax year.

Example:  You install a fence for your rental property for $3,000.  You can’t deduct the entire $3,000 as an expense this year.  You deduct it over 15 years according to the chart below.  That means you can deduct $3000/15 = $200 each year.

Keep in mind, your maintenance/repairs rental expense estimate is in addition to capital expenditures. 

You need to make allowances for both.

Many investors don’t bother giving these two estimates the attention they deserve, and their actual cash flow is quite a bit lower than their estimates.

Read my post explaining these different calculations:

Cash Flow, ROI, Cap Rate, Cash-on-Cash explained…

The rest of these are fixed costs.  These costs are degrees easier to predict, and  they tend to stay the same month-to-month.

Vacancy Rates

The best way to get vacancy rates for your area is to ask local investors. 

You should be able to find them in real estate investing clubs such as the well-known real estate investing association (REIA). 

Also check the Biggerpockets.com forum for your city.  These forums are free to use.

Network and get to know other investors in your neighborhoods and ask them what vacancy rates they are seeing.

The next best people to get this information from would be management companies that have been working in your neighborhoods for several years.  Call all of them and ask them what vacancy rates they see in your interest area.

This is also a great way to start vetting management companies. 

See my post on Finding the Best Property Manager.

Single Family Home Formula for Vacancy Rate

The main difference between calculating a single vs. multi-family vacancy rate is single family rates will be averaged over a year, when multi-families are a snapshot the current vacancy rate at a given time.

You simply divide the amount of time the home was vacant by the total time. Usually, the time period is a year.

Multi-Family Formula for Vacancy Rate

With multi-family, it’s not averaged out over a year, it’s a snapshot of today.

Instead of vacant time/total time, it’s vacant units/total units.

While the answer to the equation is actually .115, you just multiply by 100 to get a percentage.

Property Taxes

This is simple because it’s a fixed cost that you can easily look up.

Usually Zillow and Trulia have accurate information on this.

Even if it’s not there, you can check your city or county’s website.

Just google “Name of City ” and property taxes. You are usually able to look up any home by address and see who owns it and what the tax bill was the past several years.

Here’s a video where I lookup rental expense info from the property taxes website:

Keep in mind, when you buy the property, taxes could increase. There tends to be large increases when you make large improvements to the property, changes in tax rates, or you have significant appreciation.

Also, certain cities have lower property taxes for state resident owner-occupants. It’s sometimes called a homestead tax exemption. This means you may pay more property taxes as an investor than locals do when it’s their primary residence.

You can lookup the homestead exemption information for state and figure out how much of a discount it is. This should allow you to accurately estimate the expense.

Insurance

There are really two avenues to get this info, and you should do both. You can get the price the current landlord/owner is paying as well as calling a few insurance companies to get quotes.

Ask to see the bills, so you know it’s legit. Some shady sellers give you fake info.

If you call an insurance company for a quote, you’ll need to answer a lot of questions about specifics of the property. Take your best guess on stuff you don’t know yet.

They’ll ask what the roof is made of, or if the electric box is upgrade, etc. You have to pretend like you know the answer. They don’t like wasting their time with a quote of a property you don’t own yet (so fake it).

The estimate for insurance price you get should be close.

Mortgage

The mortgage is going to be a simple rental expense to estimate. You can use online calculators to figure out what your mortgage will be.

Keep in mind, sometimes your mortgage payment has property taxes and insurance figured into the bill. Make sure you know this so you don’t estimate those expenses twice.

Property Manager

This is also a fixed cost. Often is it a fee of 8 to 10% of collected rents.

Sometimes there is a surcharge on repairs. Mine was 10%.

Keep in mind, there may also be an additional fee for signing a new lease. That is sometimes one month or half a months rent. You’ll have to calculate how often you think this will happen so you can budget for it.

Utilities

This only matters when you as a landlord are responsible for paying a utility. This is rare in single family homes.

With multi-family, often landlords pay the water bill, sewer and trash, landscaping, and sometimes electricity for lighting in common areas.

Ask the owners to provide information on these costs. It’s best to see copies of actual bills. They at least should show you records of paying those bills.

HOA

There may be an homeowners association (HOA) fee or a condo fee that needs to be paid monthly. This is typically paid by the landlord, so it needs to be figured into the costs. Keep in mind, these tend to trend upwards every year.

Conclusion

This was written to give you confidence in estimating rental expenses, and to be able see bogus expense estimates when they are given to you.

This is a key part of being a successful real estate investor.

The successful ones know approximately what the property will make before they buy it. They can then make smart decisions about what they’ll pay for the property.

Like my style?

Check out my flagship page. It’s practically an E-book.

Conservative Real Estate Investing

If this was helpful, share it on social media with friends.

Do you have a different method to calculate any of these expenses?

Which one of these was the most helpful to you?

Leave me a comment now.

Rich on Money

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