2015 New Year's Resolution Breakdown

2015 was not a great year for my personal finance goals.  Here’s a quick rundown of my 2015 financial resolutions and how I plan to meet them in 2016.

1.       Max out my IRA.

a.      Accomplished.  It’s the first thing I do every year so I have money to invest with.

b.      2016:  This is always my first goal, so I’ll definitely accomplish this.

2.      Save $X in my savings account.

a.      Accomplished.  This is the second thing I do every year now that I have a house, to cover large maintenance expenses.

b.      2016:  This will come second after my IRA, and I have no doubt I’ll accomplish this.  I plan to buy a car in cash this year too, so this near-term goal will be a primary objective.

3.      Save at least $X every paycheck.

a.      Not accomplished.  We had some large expenses this year, and we basically took 3 vacations.  We went back home for two weeks, Vegas in December for two weddings, and my in-laws came to my house for the holidays.  I came close though; just needed one more paycheck in the year.

b.      2016:  I’ve already implemented some routine deductions in expenses throughout the year.  This should help balance some of the larger expenses like car and housing maintenance.  I’m also going to try and publish blog posts more frequently and build some side income.

4.      Increase 2015 passive income (dividend/interest/mutual fund distributions) by 50%.

a.      Not accomplished.  I waited too long in my investing career to focus on passive income from investments—which explains the goal of trying to reach a 50% increase.  There were several factors contributing to me not reaching my goal in 2015.  The first was a reduction in end-of-year mutual fund distributions.  There weren’t a lot of short- and long-term gains with the market dropping this year.  Additionally, some of my dividend stocks gained quickly and I sold the profit.  For example, WWE offered a 5% dividend when I bought it a low of $9, but then it skyrocketed to $18—doubling my money, and I sold it.

b.      2016:  I’m going to put more money into mutual funds during large market drops.  I will also put more money into large dividend payers whose industry isn’t doing well like oil companies and Real Estate Investment Trusts (REITs).  I have a solid chunk of money in bonds, so I’ll need to keep a close eye on the bond market and make sure that I don’t take a huge capital loss by keeping my money in those bond mutual funds just to get a passive income.

5.      Net assets of $X on 31 Dec.

a.      Not accomplished.  I rarely reach my net asset goal, mainly because the percentage increase is always higher than the market average.  I’ve also never measured my progress monthly or quarterly.  I guess I just hoped I would land on the arbitrary amount at the end of year.  The main reason for not meeting my goals this year was the massive loss I took trying to get quick money.  I invested in some speculative, risky, short-term investments and underestimated how quickly I could lose money. 

b.      2016:  I’ll need to split the goal into monthly and quarterly goals and work harder if I’m not meeting those goals.  I won’t make those same risky investments I tried in 2015 either.

I have a feeling that 2016 will be a great year for those prepared and ready to take advantage of it.  What are your 2016 New Year’s goals?

The Real Debate about Raising the Federal Minimum Wage

In July 2009, the federal minimum wage was increased to $7.25 from $6.55.[1] In his 2015 State of the Union, President Obama called on Congress to raise the minimum wage.[2] The minimum wage debate has caused protests and, like all topics, is hard split by the two parties. Most of the debate revolved around raising the federal minimum wage to $15 from $7.25. This is more than doubling the previous wage increase in just six years. The intent of this blog is not to discuss politics but to address personal finance concerns. So this blog post won’t be discussing whether we should or should not increase the minimum wage; but rather, it will focus on what you can learn from what the true debate should be on.

If you’re mathematically or economically inclined, then your first question should or probably is why isn’t $7.25 enough anymore? What’s changed from 2009 to 2015 requiring an increase of over 100%? The real answer and one of the biggest problems in our economy is the damaging impact of inflation. The debate isn’t centered on reducing the cost of Consumer Prices though; it’s simply based on increasing the wage.

If you just analyze simple inflation, using the Consumer Price Index from 2009-2015, then $7.25 is equal to $8 in today’s dollars.[3] So why is the current administration and federal minimum wage supporters asking for $15 instead of $8? The answer and another problem in our country is way we handle of our current income (regardless of what we’re currently making).

• Inflation: Every adult has experienced inflation in almost every commodity. College tuition, health care costs, movie prices, gas, food, utilities, etc. Most of us aren’t seeing our income keep pace with this inflation either. So even in times of low Consumer Price Index (which doesn’t capture all commodities) increases, inflation is still outpacing our incomes. To protect yourself, you need to start saving money for your short-to-long term goals, retirement and long-term health care costs. The economic principles of time value of money and compounding interest relies on timing to help protect you against inflation. The sooner you start saving, the better protected you’ll be against inflation.
• Handling of our current income: One of the main reasons that people want it increased to $15 versus the inflation adjusted $8 is because we don’t know how to handle our current income. People can become financially independent by making $8 an hour or by making $200 an hour. Conversely, people can be in extreme debt and financial ruin while making $15 an hour or $200 an hour. There is too much focus on how much we make and not what we’re doing with the money we’re currently making. When I help people with their finances, the first thing I do is track expenses. By raising the minimum wage to $15 we’re not solving the problem of helping people financially. To help protect yourself, you need to track your expenses and maximize the income you currently earn. I’ve always recommended to people that before you seek and pay for professional financial guidance, you need to track all expenses for 30 days. About 60% of people I’ve dealt with quickly saw where they could make life changes without earning more income.

So regardless of whether you oppose or support a federal minimum wage increase, you can still implement changes in your life to protect yourself from the real problem.

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[1] http://www.dol.gov/whd/minwage/chart.htm

[2] https://www.whitehouse.gov/the-press-office/2015/01/20/remarks-president-state-union-address-january-20-2015

[3] http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2015

Multi-Level Marketing (MLM) Businesses and Taxes

Multi-Level Marketing businesses (MLMs) have exploded across the country; especially among the military spouse community. MLMs allow military spouses to run their own businesses at home and the job can move with their military spouse. I don’t have an accurate count but I’m sure there are nearly a hundred different MLMs out there. I’ve experienced the following MLMs: Pampered Chef, Amway, WUN Life, Isagenix, Pure Romance, Nerium, Origami Owl, Kyani and Scentsy.

A key thing MLM operators need to know is how to file their taxes. Although I haven’t run an MLM; I do have sufficient experience in tax preparation and here are some suggestions I’ve found doing research on this reader requested topic.

·         Create a separate checkings account to run your MLM. This will allow you to quickly differentiate between costs of running the MLM and income you’ve earned which will come in handy when dealing with deductions.

·         Before you even start your MLM find out if they give you a 1099-Misc Income Tax Form which identifies how much the company records as income you’ve made. Talking with MLM owners I found out that Pure Romance, Pampered Chef and Nerium file 1099-Misc forms with the IRS so you can claim that on your taxes as regular income. If an MLM doesn’t provide a 1099-Misc then it is incumbent on MLM operators to figure out how much income they’ve made. This is easier if you have a separate checkings account.

·         Running an MLM is similar to being self-employed and as such you can claim routine expenses as deductions if you itemize your deductions. If you have a separate checkings account it will make it easier to identify the costs. Some common deductions are phone and internet, party hosting expenses and gas/vehicle expenses for those MLMs which require frequent deliveries and travel. Itemizing deductions can help decrease the tax burden but it is important to ensure you’re legally entitled to the deductions.

·         If your tax situation requires you to itemize deductions then I recommend seeing a tax professional; either a tax preparation company or with a Certified Public Accountant (CPA). A professional can ensure you meet the qualifications for itemizing certain expenses and protect you from an audit.

·         For my non-military readers, if your MLM is your family’s sole source of income PLEASE ensure you meet the necessary requirements to comply with the Affordable Healthcare Act (aka Obamacare). The penalties can be steep and are basically equal to the cost of a “bronze” health care plan. So until the law is changed or repealed, it’s a better return on investment to just ge the healthcare. Like I said before, an MLM is similar to being self-employed so you’ll need to ensure you comply with the federal government’s requirements for health care.

If you’ve run an MLM and filed taxes before please leave me a comment or recommendations you have for other MLM owners.

2014 Year in Review and 2015 New Year's Resolutions

Every year I create financial goals to help guide me through the year. I first read this quote when I started my fitness journey regarding meal preparing, "If you fail to prepare, then you are prepared to fail." (Unknown). I think this is relevant in any goal management, but especially with financial goals. Here's a sneak peek at how I managed my finances in 2014.

• Max out Individual Retirement Account (IRA) - In 2014, the limit was $5,500. This is always my first goal and I've been maxing it out every year for almost a decade. This is my first goal in 2015 as well. I use Fidelity to manage my IRA; if you're interested in starting a Fidelity account please let me know so I can refer you. In 2014, I met this goal.
• Put $XXK into my "high-yield" savings account - This is my emergency savings account. I'm expanding it beyond the 6 months of bills (the typical advice) to add 12 months of bills for my new house. My goal is to have the ability to absorb a whole year of not having a renter when we PCS and have to rent this house out. Some of the increase will also be for a new car in 1 1/2 years. I use CapitalOne 360 (the bank that bought ING Direct) for my "high-yield" savings account; if you're interested in starting a CapitalOne 360 account please let me know so I can refer you and we both get money. In 2014, I met this goal.
• Save at least $XK from each paycheck - Ever since I was an E-4 I've been creating this goal. No matter how hard you plan, you'll always have unexpected costs throughout the year. For this goal, I'm focused on the end goal so if I can't save the goal from one paycheck, I'll make sure I save a little more from a future paycheck. But this gives me an average savings goal from each paycheck and allows me to see if I'm exceeding my goal or not meeting it. In 2014, I met this goal.
• Increase dividend income by X% to $XK - One of my retirement goals is to supplement the amount I lose by retiring with dividend and interest income by the time I retire from the Air Force. This is a lofty goal and I may need several years after Air Force retirement to achieve it. Nonetheless, I try finding better return rates on my investments to achieve this goal. One of my new investments this year was Lending Club. They offer loans ($35K or less) to people and investors can contribute $25 increments to their loan so it spreads the risk while offering a better yield. By playing it safe, I earned a 9%+ return on investment this year. If you're interested in starting a Lending Club account please let me know so I can refer you and we both get money. In 2014, I DID NOT meet this goal. I was very close but missed the goal by less than $200. I'm not too worried, but next year I would like to say I exceeded the new goal I set.
• Net Assets of $XXXK by the end of the year - This is just an overall goal. I don't focus on how much I have saved total. I focus on what the money is doing and what return on investment I'm getting. People focus on a round number like $1M without figuring out what their going to do with it once they get there. Most rich people don't even care how much total they are worth, they only care how much money it's earning so they can use it. Either way, it helps me focus and ensure I'm earning a decent of return on investment. In 2014, I DID NOT meet this goal. I tried to do some ultra-risky investments to help my wife pay off her school loans and they all back fired on me. I lost a lot of money this year on those investments and it stings pretty badly. My house equity didn't rise at all either like I had expected. In fact, I manage my Dad's IRA and it's pretty conservative and safe and he crushed my returns this year.

These goals are specific to me. If I had debt-management goals, then those would be near the top. If I didn't have an emergency savings account, then that would've been my first goal. What are your goals for this year? If you need help or are interested in being referred so we both get money please leave me a comment or e-mail me at bjone6 @ gmail . com (spaced out to prevent spam bots).

Budgeting Made Easy

For most people, being on a budget feels like being on a diet. The first thing people think of when they consider a budget is restrictions. Having a budget isn’t about restricting; it’s more about knowing where your money is going and knowing where your money goes is one of the most crucial steps to financial planning. I recommend doing the 30-day spending challenge I wrote about here: 30-day Challenge to track your expenses. Creating a simple budget is easy. Here’s how I recommend starting.

1.       Income. On the left side of your excel sheet or piece of paper, list how much you make in a month. Then on the right side, list your bills.

2.      Fixed bills. Start with listing your fixed bills. These are the bills that never change regardless of how you conduct your life and/or the minimum payments on installment loans. This typically includes rent/mortgage, insurance, car and student loan payments and sewer/trash bills. Generally speaking, you have no control over these bills.

3.      Variable bills. Next, list your variable bills. These are bills where if needed, you can reduce them if you need additional money. This typically includes gas, food, cable, phone, electricity, water, etc. When people come to see in dire financial need, it’s easy to reduce fast food consumption or simply downgrade current internet and cable service freeing up additional income to get out of their predicament. Use an average or use the last month’s bill to keep track of the amount.

4.      Take your income less your fixed and variable bills. Subtract your bills from your income and see how much “discretionary” funding you have available. The amount you have left will determine how you should proceed with your budget.

5.      Credit Card debt. Always list your credit card debt as a bill last. It is important to understand the negative impact of credit cards. Depending on your financial situation, you may only be able to pay the minimum payments from your available funding. If you have more money after you pay the minimum payments, then put more towards your credit card debt to help pay it off sooner.

6.      Savings. After paying your bills and credit card debt, the rest can be put to whatever savings strategy you are pursuing.

Creating a budget is that simple. It doesn’t require complex excel knowledge, a mathematics degree or expensive apps. If you get a promotion, you can quickly see the impact so you can increase your credit card payments or your savings. If you get into financial trouble, you can start reducing how much you pay towards your credit cards or you can put more money towards your variable bills. One quick tip: Don’t round your bills. People who round their bills, miss an opportunity to focus fire on financial objective. That being said, here’s a sample budget.

Income (Step 1)	Fixed Bills (Step 2)	Variable Bills (Step 3)	Income – Bills (Step 4)	Credit Cards (Step 5)	Savings (Step 6)
$5,000	-$1,500	-$500		-$200
	-$750	-$250		-$150
	-$250	-$200		-$75
$5,000	-$2,500	-$950	$1,550	-$425	$1,125

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.

How Do Celebrities Go Bankrupt?

Have you ever been confused about how celebrities lose their money so quickly? Has one of your favorite musicians or athletes just filed for bankruptcy even though they just signed a multi-million dollar contract?  How do lotto winners lose their money so quickly and end up worse than they started?  All of these situations happen because these celebrities aren’t watching their expenses. They know they have a lot of income, but they rarely track their expenses. This is an important lesson we all can learn from.

Let’s consider a musician, 19 years old, who has $3M in income and he purchases, in cash, a $2M mansion and a $100K car.  In his mind, he has $900K to live a lavish lifestyle and his recording company is telling him, “It’s just the beginning.”

But what these musicians don’t realize is it’s expensive to have a lot of money once taxes, insurance and maintenance is included. Think about your own car insurance compared to what you drive and your age and then consider how expensive it would be for a 19-year old with a $100K car or two $100K cars. Property tax is based on the value of the house, so the more expensive house, the more taxes. 

But even including all the recurring expenses, our musician would still have a lot of income compared to our standards. Most musicians have money managers handling their finances but never actually see the income and expenses. The money manager may recommend to our musician to stop spending so much, but the lavish lifestyle is addicting and the industry promotes “keeping up” with other celebrities. Eventually, the mathematics catch up and it happens quicker if the musician stops selling records, or the celebrity falls out of popularity, or the athlete gets released.

While we may not have any sympathy for those making $1M or more every year, we can be able to learn from their mistakes and apply to our own income levels. Here are some lessons learned from celebrities:

1.      Know where your money is going. Try my 30-day challenge I discuss in this blog post: http://militaryfinrep.blogspot.com/2014/02/the-secret-to-becoming-financially.html

2.      Sometimes our income is out of our control, but almost always, our expenses are within our control. Like we’ve all seen with celebrities, we’ve seen plenty of “rich” people go broke and I’ve seen plenty of “not rich” people live financial sound lives. Our income determines how much we make but our expenses determine how much we have.

3.      If someone, like your spouse or money manager, tells you to control your spending, then you might want to listen.

4.      “Keeping up” with other people can be a very expensive habit. If you’re concerned with “keeping up” with what other people are spending, then be equally concerned with what they are making to be in line with them.

What’s the most surprising or crazy celebrity, athlete, or lotto winner, financial story you’ve heard?