Military Financial Report

Sunday, April 20, 2014

Give Me That Passive Income

Passive income is when you generate income continuously without doing something. Our military retirement is a “defined pension” plan and after 20 years or more of service, we collect passive income for the rest of our lives. This is one of the ways rich people stay rich—by generating more passive income. The goal is to establish multiple streams of passive income before you retire. Here are examples of the most common types of passive income.

· Interest – The most common type of passive income is generated by interest. Your bank accounts, emergency cash account and brokerage accounts all should be generating interest. Take a quick look at all your accounts and make sure they are generating interest. If not, start searching for banks that offer an interest-bearing checkings or savings account. If all your accounts already have interest rates, then make sure you are generating the highest possible interest rate. Go to www.bankrate.com and search around for the highest interest-rate accounts or ask your bank if you qualify for different types of accounts that may generate more interest. I have USAA for my checkings account, CapitolOne 360 (e-mail me for a referral link so we can both make money) for my emergency savings account, and my Fidelity brokerage accounts (IRA and taxable) both pay interest.

· Dividends – Most rich people earn a majority of their money through dividends from dividend-paying stocks. In 2003 the tax rates were changed and dividends were only taxed at 15% versus just being added to your income, potentially bumping you up a tax bracket. Even the behemoth Microsoft (MSFT) and Apple (AAPL) started paying dividends after the favorable tax law change. When investing in stocks, make sure that your overall portfolio yield is more than a 30-year treasury bond, or else you may be taking on more risk for less reward. You can go to Yahoo! Finance home page and see the yield for a 30-year treasury bond and then check your portfolio. If you invest in mutual funds, then find some mutual funds that pay a higher yield. Do the same with stocks. Dividend stocks tend to be less volatile too. If you are a riskier investor you can look at phone companies *AT&T (T) or *Verizon (VZ), utility companies *SunGas (SGU) and Real Estate Investment Trusts (REITs) Annaly Capital *(NLY) for the highest yields. You should also find companies that regularly raise their dividend payout rate too *Johnson & Johnson (JNJ). If the stock market scares you, you can seek interest rates from Certificates of Deposit (a.k.a. CDs [you can check those rates on www.bankrate.com too]) or Treasury Bonds, from 6 months to 30 years.

· Real Estate – I put this one under “passive” cautiously. Anyone who’s owned a house knows it’s anything but passive. But after the maintenance is done, you’ve found a good property manager and the house is rented out, it becomes passive income. If you purchase homes while you’re young with 30-year mortgages and some homes while you’re older with a 15-year mortgage, then these homes could be paid off by the time you retire (59 ½ or older). The mortgage you’d be collecting would be passive income. For over 4 years, I was paying $1,500 every month to live in a house that had been paid off for over 20 years when I was stationed at Vandenberg AFB, CA. The house was in “decent” condition so my landlord was basically earning $18K a year just from the one house. At the end of the four years the house started needing some major repairs [not caused by us], but even after those repairs, he earned $50K+ from me in passive income. Imagine if you had one to five rentals. Our frequent PCSing in the military gives us the potential to purchase new homes each PCS and I’ve met many successful military landlords who did just that.

· Rewards – I’m a big fan of Bitcoin (read more about Bitcoin with this post I did: Bitcoin). A lot of people complain that Bitcoin is unregulated, not-easily used and purely digital, not backed my anything. But a lot of us already using a form of digital currency with our credit card Rewards. We receive a different type of interest called Rewards when we use our credit cards. Some cards offer airline miles, gift cards or actual cash. I use my credit card to purchase everything and then pay it off every paycheck so I get all the rewards without paying any finance charges. I’m basically earning Rewards for free. Depending on how much you spend, you can look at getting a reward card with an annual fee and get all types of awards. It’s important to compare the annual worth of your rewards and compare it to your annual fee and make sure you are making money. These Rewards are unregulated, can only be used on the products your credit card allows and purely digital. During the 2008 financial crisis, many banks went under and the Rewards were lost. Only some of the banks honored the previous banks’ rewards system.

BL: If you’re not earning interest or rewards on any of your normal banks accounts, then you should switch now. Continue to grow your passive income. This blog and my YouTube channel are attempts on earning passive income. At the end of a 20+ year military commitment, you can supplement your military retirement with all kinds of different types of passive income.

* These stocks are used as examples and not recommendations to buy. Of the stocks mentioned, I only own NLY.

Wednesday, April 9, 2014

Should I Be Concerned About High Frequency Trading (HFT)?

What is High Frequency Trading (HFT) and should you be concerned? I’m sure you’ve recently seen some news reports about HFT and depending on your news sources’ political bias it may oppose or support HFT. The audience of this blog is primarily military members E1-O6 and knowing that, my personal opinion, is that High Frequency Trading should not concern you, from a threat to your financial goals perspective. HFT doesn’t prevent you from reaching your financial goals nor is it “stealing” from you as some articles suggest. It may impact your ideologies, in terms of right and wrong, fair or unfair, to tax or not to tax; but as far as your financial goals, HFT should be irrelevant to you.

High Frequency Trading (HFT) is a term used for computer programs that execute millions of trades within minutes. The HFT you are currently reading about is used by Stock Exchanges to match buyers of stocks will sellers of stocks and vice versa. For each trade, the HFT earns $.0015[1] or somewhere around there, but multiplied my millions of traders per day. Your first thought should be quoting the “Office Space” movie where the protagonist is explaining that he is “taking” a fraction of a penny, so it’s not really stealing and Jennifer Aniston rightly rebuts, saying it is “stealing.” The difference between the Office Space movie and the recent HFT articles is Accounting principles actually account for those fractions of pennies, so taking them is really stealing. The HFT you are reading about is actually part of the system, right or wrong, it is a necessary “evil” for our stock exchanges. For every buyer there has to be a seller and these HFT machines provide that service. The problem is now we have HFT machines placing buy and sell orders a million times a day and other HFT machines placing those purchases. If the market moves in a way different than the HFT is programmed to handle, the market could swing wildly, affecting our 401(k)s, TSPs, IRAs, and investment accounts. On May 6th, 2010 this scenario happened and the DOW Jones lost 1,000 points or 9% in less than an hour[2]; but, it was the same HFT computer programs that enabled the market to bounce back to normal. NOTE – I was at work when this “flash crash” occurred and would have loved to buy stocks during that hour and get some quick returns.

Should you be concerned? As of now, no, you shouldn’t be concerned. HFT trades makes up 50%[3] of the daily activity on the New York Stock Exchange and some articles use that number to scare you; however, the large investment banks still hold a majority of the stocks in mutual funds providing a balance to the market. So until something changes, HFT provides both a scary volatility and a scary balance to the stock markets. You should continue applying sound financial principles and HFT won’t affect you. 1) Establish an emergency fund 2) Eliminate or Reduce Debt 3) Max out tax-advantaged accounts TSP, IRAs, 401(k)s, 529 plans, 4) Save and invest everything else. HFT sounds scary, but for us normal investors, it doesn’t affect us. If another flash crash happens, it could provide an opportunity to buy. If a flash increase happens, it could provide a solid selling opportunity.

Final Thought: Values of anything have increased wildly in a massive bubble creating winners and then popped, leaving losers, even before computers were invented. One of the first examples of this is the prices of Tulips in the Netherlands in the 1600s and High Frequency Trading was not around then. Getting rid of HFT won’t stop bubbles from forming and won’t collapse the whole financial system. Until something changes, keep investing smartly by diversifying and avoiding fees and taxes.

[1] http://www.investopedia.com/terms/h/high-frequency-trading.asp

[2] http://blogs.wsj.com/marketbeat/2010/05/11/nasdaq-heres-our-timeline-of-the-flash-crash/

[3] http://www.investopedia.com/terms/h/high-frequency-trading.asp

Monday, April 7, 2014

How to Pay Off Student Debt

Some experts argue that the next financial bubble will be from Student Loan Debt. In 2011, the Fiscal Times reported the student debt bubble at $2.3T.[1] Many people have a disproportionate amount of debt compared to their potential income. “Going to college” has become a socio-political nightmare for political, private and ideological reasons. The military has its Tuition Assistance programs and the Montgomery GI Bill/Post 9-11 GI Bill, but our dependents, family members and friends may still struggle with their student loans.

Paying down your student loans can be confusing, but here’s my recommendation on how to pay them down quicker using the “Snowball” effect. First you must identify what type of loans you have, then pay down the interest bearing loans by lowest balance first and lastly finish paying off the non-interest bearing accounts.

Identify the types of loans you have: There are many types of loans given to college students. Some are subsidized by the government with adjustable or fixed rates and some are issued by the state or privately by the college. The first step is to identify which loans are interest-bearing and which ones have adjustable interest rates. Some loans, for those in the medical and legal fields, are adjustable by the amount of income you make. If this is the case, then you can find ways to lower your adjustable gross income like maxing out a Traditional IRA (vs. a ROTH IRA). Read more about the difference between a Traditional IRA vs. a ROTH IRA here: Traditional vs. ROTH

Pay them off in order of smallest to biggest balance: Start with your smallest balance interest bearing loans and put any extra in your budget towards that loan and then pay the minimum payment on all other loans. As each interest bearing loan balance is paid off, you “roll” that extra payment into the next interest bearing loan with the next smallest balance. This creates a “Snowball” effect as each paid off loan’s minimum payment gets lumped with the next minimum payment and the debt will be paid off faster.

Non-interest bearing loans last: If you have non-interest bearing loans, then keep those to the last. Pay the absolute minimum payment or defer them if possible until last or until you have a job to make the minimum payments. Don’t feel rushed to pay these off because “investing” your money anywhere else would yield you a better return.

My wife attended the University of Phoenix and received a Health Care Administration Bachelor’s degree. The loans totaled to almost $40K. She spent the next seven years raising our two kids. Now that both of them are school aged, she started paying them off using this technique. She was able to eliminate all the interest-bearing loans and then deferred/forbore the rest until she just recently got a job as a heath care administer and thus inspired me to write this blog post.

[1] https://www.thefiscaltimes.com/Articles/2011/05/09/Rising-Tuition-Student-Loans-Education-Bubble

Friday, April 4, 2014