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.

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

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

Military Financial Report Video #2 - USAA Mutual Funds

Check out the second video in my YouTube series.  In this short YouTube clip, I take you through a quick tour of USAA's mutual funds and how to find which one is right for you.  Please let me know if you would like a YouTube video on a specific topic.  Also, if you like the videos, please remember to Subscribe, Comment and Like the videos.

Military Financial Report Video Series #1 - Yahoo! Finance

I'm really excited to announce that I'm starting my YouTube video series.  It will be a whole new way of interacting with my readers.  In this first video, I give a brief tour through Yahoo! Finance and searching for your favorite stocks.  Check it out here!  Please remember to Subscribe, Comment and Like!

Marriage and Finance Part 2: Logistics

In Part 1 of my Marriage and Finance series, I discussed some of the common roles I’ve seen. There are many other roles, but they are rarer. They key is to understand the roles you and your spouse play and nurture the strengths and mitigate the weaknesses. In Part 2, I will discuss the logistics of finances in a marriage. Financial planning takes care of the “basic needs” (think Maslow’s Hierarchy of Needs); i.e. food, shelter, telecommunications, etc. If you are having difficulties fulfilling your basic needs it will be difficult to have good communication or fulfill each other’s sexual needs and/or establish mutual happiness. It all starts with finances taking care of basic needs and good communication.

·         Common goals – Have you seen the Wells Fargo commercial with the customer service rep saying, “Now let’s talk about your…” and then man says “new motorcycle” and the woman says “home repair”?  This is an example of having different goals and can cause financial arguments. Some goals can be mundane (cost of interior design) yet still cause significant controversy in the household. I think good communication in the beginning resolves most of these disagreements. I’ve also found visual aids help facilitate discussion and agreement.  Have each person write down his or her goal and then create a plan on how to get there.  Discuss both goals and plans and see if it helps you come to an agreement.

·         Always point the “blame finger” on yourself first – Men will often say, “My wife has a spending problem” and then after a little research, she indeed has a spending problem; however, he also has a spending problem. Women will often say their husband spends too much money on car parts or video games but neglect their shoe and purse addiction. Usually when blame is placed, it puts the other person in defense mode and then creates an argument. Instead of blaming, try saying, “we have a spending problem and I’ll reduce spending money on video games and you can reduce spending on shoes” or whatever the commodity of overspending is. If one person has a valid spending problem, it may be because they are unfamiliar with finance basics and/or there’s something wrong in the relationship and spending is just a symptom.  If it’s financial ignorance, then seek help from a friend or counselor. Someone in an “official” capacity can say the same thing as you, but it now will be “official”. If it’s something deeper, then you may need to protect the finances from being negatively affected until the relationship problem has been identified and corrected.

·         Account management – There is way too much discussion and debate about whether it is more appropriate to have separate or joint accounts. I’ve seen scholarly articles and books written solely on this subject. Most people think what works for them will work for everyone, like parenting advice. But the real issue is trust. Regardless of how your accounts are set up, the situation must establish trust in the relationship. If both people have separate accounts but have 100% trust then it will be successful and vice versa for joint accounts. However, due to the nature of the military and deployments, it is always important to ensure both people have access to all accounts. Whichever you choose, make sure trust is intact. If the relationship does not have trust, then the issue is bigger than account management.

·         Budgeting – A lot of arguments stem from how to budget your money with one paycheck or with two paychecks. The key to this argument is to ensure you establish equality. Spending and saving money should be equally distributed. The focus should remain on the Family and remember all funds belong to the Family, not to the husband or the wife, regardless of who makes the money. There’s debate on how to best deal with this, whether all funds are deposited into the same account and budgeted in totality or if each paycheck should have a percentage taken out. There are pros and cons to each method and each couple will have to make that determination on their own.

BL:  Be very careful taking financial advice in marriages, to include this article. Every relationship is different and implementing advice that is not suitable to your relationship can cause severe trauma to the relationship. Married people should discuss their financial position frequently. Financial insecurity can bleed over into so many other parts of a relationship. Secure the finances and securing the relationship should be easier.

Marriage and Finance Part 1: Common Roles

I’ve always been reluctant to post about Finances and Marriage because it is such a touchy subject. But a fan of the blog suggested I should, so I shall. This is Part 1 of Finances and Marriage and will concentrate on the common role divisions I’ve typically seen. The list is not inclusive and your marriage may differ on range of the power you and your spouse exerts in the role. Also, I don’t know if it’s the “alpha-male” syndrome in the military, but women are more likely to seek financial advice then men. Some men will go bankrupt, face disciplinary issues and ultimately get a divorce before seeking financial advice. When I volunteered at an Airman Family and Readiness Center, I would only typically see people after the disciplinary issues. But according to an article in Psychology today, couples who fight more than once a week about finances are 30% more likely to get a divorce¹ and the extra pressure only compounds the military divorce rate. Here are the roles I’ve typically seen:

·         Dominant Money Maker – In the military, this is commonly the active-duty member. The money maker makes the money and also handles all the finances. In the beginning of a marriage, this is often the easiest role division. But as time goes on, the submissive spouse will lose independence or feel unequal. If your spouse is financially submissive, continue to update him or her on the family’s overall financial situation; whether they want it or not. This role division could be dangerous if the dominant money maker is reluctant to take financial advice. If the couple experiences financial troubles, the money maker will become emotionally distraught and it will cause a wedge in the relationship. If the submissive spouse is completely dependent, then financial troubles can cause major troubles. Another complication is, in the military, we are held liable for supporting our dependents as long as they are qualified dependents. So when a couple is “separated” the military member is still liable for supporting the dependent, which may have no experience in financial independence.

·         Dominant Dual-Income Role – This is also quite common in the military with one spouse being the active duty member and the other having a civilian job. At least from what I’ve seen, there isn’t a correlation from the person making more and them being the dominant member. Usually the spouse with the most financial fluency takes the dominant role. Like everything in marriage, communication is the key to success with this role division. The submissive spouse needs to be engaged in the “end goal” and the direction the family is going financially. After the goals are set, the submissive spouse just needs updating. I’ll cover the logistics of making this role division work in Part 2 of the series. This role division could be dangerous if there is disagreement in the goals or if the submissive spouse unexpectedly decides to take a more dominant role. Again, constant communication is the key.

·         Submissive Money Maker – For a lot of military members, finances are the last subject they want to think about after a difficult day at work. In this situation, the spouse becomes the dominant financial decision maker. I found this role division works the best if there are no other complications in the marriage. But if there are other surface cracks in the relationship, this role division could be difficult to maintain. If the job becomes too stressful, the money maker could feel like a “slave”—working all day and someone else getting the money. The spouse needs to ensure other aspects of the marriage are sound before trying to fix any financial issues. Often times the money maker can feel like the spouse is “lazy” and not keeping up his or her “end of the deal”. The submissive money maker is usually okay with relinquishing control if they are happy with the “stay at home” duties.

·         Equal Roles – At least in the military, I’ve found it very rare that both spouses are equally interested in being dominant in financial planning. In this division role, both spouses are usually both dominant in all areas and continuously butt heads from simple decisions to life-changing decisions. The marriage, in general, is highly volatile. They have the highest of highs and the lowest of lows. Like everything, strategic communication is the best advice. This may sound unorthodox, but visual aids help greatly to keep emotions from flaring. Go to a website, create an excel sheet, or even make a PowerPoint to ensure a logical, rational discussion is held. Banks DO NOT care about the fight and make-up you all just had.

Regardless of the type of division role you have, I highly recommend that when discussion finances, both spouses try to use the word “we” as much as possible. Try to say, “we need to cut expenses,” or “we should save more.” I’ll recommend how to manage accounts, maximize finances and how to prevent financial fights in future parts of Finance and Marriage. What kind of role do you and your spouse have? Is it working?

¹http://www.psychologytoday.com/blog/communication-success/201304/how-money-issues-predict-divorce-how-prevent-them