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financial principles

All about making a living off dividends

by Yoda July 12, 2019

Passive income has become a big topic now a days. As people become more busy and stressed, they are trying to search for alternate sources of income. Something they can earn passively. Making a living off dividends is one of the best ways to take part in investing and growing your wealth. Be warned this is not a get rich easy scheme.

Living off dividends passive income strategy requires you to put a lot of time and effort over a long term to be successful. I wanted to break down some myths about dividend investing with facts and explain how you can be successful in this strategy.

Let’s get started!

What is a Dividend?

When any public company makes a profit any year, it needs to decide what to do with its profit. This is usually called the question of capital allocation. A company can:

Invest back in its business in R&D, in operations to grow more and make more profit next year.
Invest in acquiring a new company and boost its return on invested capital.
Return capital to shareholders in form of buying back stocks thereby boosting EPS(Earnings Per Share) or by giving dividends.

A company need not only do 1 or 2 of the above-mentioned things. They can employ all 3 strategies every year. That third point above is where dividend investing comes into picture. Dividend is essentially your share of profit in a company in which you own stock. When you purchase a stock of a company you are part owner in that company. You have the right to vote for the board of directors in the company. By voting them in, you expect them to make sensible decisions on the above 3 criteria. So, the executives in the company every year/quarter announce if they will have a dividend or not. They announce the following dates too which are important to know when investing in such stocks:

Record Date	Date on which the broker will check to look who all own the stock that day to calculate how much dividend owner of stock on record will get.
Ex-Dividend Date	Once you buy a stock it takes couple of days for the transaction to settle and for you to be a shareholder in the company. So, this is the date before which you need to buy the stock in your brokerage, for you to show up as the owner of the said stock by record date. This is usually 1-3 days before record date.
Payment date	That’s the date on which you will get the payment of dividends in cash/stock in your account as per the company’s policy. Mostly its cash and you can re-invest it automatically or use it for buying other stocks.

Why Dividends?

Dividends are actual income (Passive Income)

No doubt capital gains via price appreciation of a stock are good. However, you need to sell the stock to realize the gain. With dividends you get a part in the profits of the company without selling the stock. You can choose to reinvest it again to get more dividends next year. Over long term, you will see your dividends compound and you would see yourself living off dividend income alone. Again mind you this can easily take from 10-25 years depending on how much you invest every year. Nothing in life is easy and dividend investing needs time and effort on your side, but its definitely possible. I know a few people already living off dividends in retirement.

Dividends force executives to be more sensible

Importance of this cannot be understated. Sometimes management makes foolish decisions to acquire companies out of their circle of competence. They spend a lot of money and years down the line, we don’t see any returns at all. A lot of such acquisitions must be written off in balance sheet in form of goodwill impairment. Having a dividend policy forces the management to make more sensible/disciplined decisions. This leads to better returns for you as an owner in the company.

Risk Management from volatility

Dividend stocks are a way to lower the risks arising from volatility in daily/monthly/yearly stock movements. Since the owners of dividend stocks get their dividends as income every year, they are more open to not selling the stock in tough times and giving the company a chance to tackle problems at hand. Many companies that have an established dividend policy also have a large base of owners who are looking for those dividends to come in like clock work and they are more forgiving of the performance of the overall appreciation of stock.

Dividends taxed favorably

Dividends are taxed favorably under the current tax scheme. You pay lesser taxes for qualified dividends as compared to your taxes on income.

Dividends Drive overall Stock returns too!

There is a lot of data and analysis done that proves companies that pay dividends outperform companies that don’t pay dividends over long periods of time. Look at this chart below for a comparison between the index of dividend stocks vs non div paying stocks (courtesy Hartford Funds):

dividend vs non dividend

As you can see in the last 4-5 decades dividend growth stocks have outperformed the whole market. Check out some articles from Hartford Funds and Raymond James which go on to give way more data on how over the long term, dividend stocks outperform non dividend paying stocks.

Dividend Yield Investing vs Dividend Growth Investing

Dividend yield is basically ratio of total dividends given out per year by the price of the stock. For e.g. if AT&T (T) pays out 2.00$ every year and its current price is 31.62$ then the yield is 6.32%. So, it might make sense to buy the stocks yielding the highest to get more income. However, do not go chasing the yield. Usually stocks with 10-20% dividends are highly risky and prone to getting dividends cut soon. Dividend Yield Investing (DYI) focuses on having more income from your stocks. Usually people who are close to retiring and have a more conservative approach prefer dividend yield investing. Usually if you look at high yield companies they do not increase the dividends by huge amount every year. In case of AT&T its usually 1-2% per year.

Total Return= Dividend starting Yield (6.32%) + increase of 2% in dividend payout every year + capital appreciation

Meaning you get 6.32% return every year using dividends alone. I haven’t even included any stock price appreciation yet in the above calculation. Neither did i include dividend raises, nor did you sell any stocks to get this money in your pocket. See the magic of dividends?

People who are younger and have much more time to compound money usually should do Dividend Growth Investing(DGI). This is where you forgo the initial high dividend yield in favor of higher dividend increases every year. E.g. Starbucks (SBUX) yield of about 2.79% at price of 51.62$ as of 15-JUL 2018. However, if you notice the annual rate of increase of dividend over the last 5 years, its almost 20-25% annually!

Total Return = Dividend starting Yield (2.16%) + 20% increase in dividends every year + capital appreciation

Just as Einstein mentioned, compounding is the 8^th wonder of world. Real magic happens if you re-invest these dividends to buy more of the same stocks. Since more stocks next year would result in even more dividends. This is where dividend growth investing also leaves dividend yield investing behind. If you continue to Dividend Re-Investment Program (DRIP) and reinvest dividends its easily possible you will have a much higher yield in 8-10 years for your DGI stock as compared to the DYI stock.

Let’s look at Starbucks and AT&T stocks as of 15^th Jul 2018:

You can see the starting and ending yield on cost in these 2 investments above. Over time a DGI stock usually performs and returns way more money. However, it obviously comes with its risk. At&T has many years of history in successfully paying dividends. Starbucks has only 5-6 years of history paying dividends. But there are many indicators and fundamentals to look for when choosing such stocks.

Case against Dividend Investing

Dividend payout = Lower share price

This is true, every time a distribution gets paid out the price of the stock goes down by equivalent value on the payout date. People argue what’s the point of getting dividends. However, that’s just being very short term in thinking. If you plan on holding such stocks forever and you should, how should a short-term blip on payout date matter at all? Over the long term, company grows and so does the stock price!

Dividend paying companies grow less

Another argument is only companies that have stopped growing or have no use of cash, pay out dividends. Such companies cannot efficiently allocate capital and so choose to give out dividends. So capital appreciation on the stock gets hit. You won’t be able to make much off of capital gains on stock. However as mentioned earlier, good dividend stocks bought at correct price have great potential to provide above average returns.

Preferential tax treatment for dividends can change

This is a minor threat. Currently you pay less taxes on dividends as compared to short term capital gains on stock sales. However, nobody knows the future, and this can change at any time. When that happens, its possible such stocks can fall out of favor.

Dividend stocks make you miss out on fast growing industries

Usually most dividend stocks belong to consumer cyclical, consumer staples industries. Companies that have very stable fixed stream of income. Some financial companies etc. Argument is that tech stocks which grow the fastest usually never pay dividends. So, if you do not buy such stocks you are missing out on the best growing stocks in the market. However, there are big tech companies like Microsoft, Apple, Intel, Cisco etc. that pay dividends and increase them at a fast rate. Secondly, I never said to not have any non-dividend paying stock in your portfolio. Ideally you should have a balanced portfolio of stocks, bonds, REIT’s as mentioned in my earlier article on portfolio building.

Dividends are not guaranteed

This is true. In the recent past companies like Kinder Morgan Inc (KMI) and General Electric (GE) have cut their dividends. They were considered dividend stalwarts but fell into a lot of trouble and had no choice but to cut dividends. However, for such companies there were always signs. Things like payout ratio which was increasing, financial health was deteriorating, too much debt, not being shareholder friendly etc. But most of these signs were identifiable.

How much do you need for living off dividends?

There is no fixed answer to this question. You know how much you spend annually and how much you would need. For e.g., lets say you need about 45K annually in your retirement around age 60. Assuming you go on to live for another 30 years, you need about 1.3 million dollars (30*45000). Another way to think in terms of dividends is you need about a million dollar portfolio of dividend stocks to generate about 50K$ every year at 5% dividend yield. You will only be living off the dividends. Principal can still keep on growing at a healthy rate.

Also realize that its possible you do not even have to actually save a million dollars. You can just keep on investing money over 15-20 years & re-invest dividends. Your portfolio will keep on growing during that time, eventually reaching a million dollars. At that point you can simply stop investing stop re-investing and live off of dividend income. Here is a calculator that shows how starting with 0$, investing 12000$ annually with a dividend yield of about 4% and below avg price appreciation of 5% you can get to 1.4 million dollars in 30 years.

The above are just some numbers I plugged in. You can even do this 12K investment in your Roth account and your taxes will be 0! Feel free to play around on the calculator with different numbers, but living off dividends is definitely possible.

Best free resources to get you started with dividend investing

Dividend Condition(DIVCON) free ratings

This is a free rating system developed by the firm Reality Shares. They rank dividend stocks from highest (5) to lowest (1) depending on their probability of increasing dividends in next 12 months. They look at cash flow, future earnings, buybacks, dividend trends, etc. to come up with this rating. Although not iron clad, but its a good thing to check up on when deciding to buy a dividend stock. We have heard the saying safest dividend is the one that has just been raised. This tool allows you to find out stocks that most likely will raise it! Its also a good idea to look at their quarterly list of worst ranked (1) stocks which hints at possible divided cuts. This could allow you to highlight a stock in your portfolio and go deeper into it. Check more about them here.

Invest alongside the Superinvestors!

Its always good to have some extra information while investing. Sites like Insider Monkey, Whale Wisdom & DATAROMA allow you to see what the most famous super investors like Buffett, Munger, Bill Ruane (Sequoia Fund) etc. bought in the most recent quarter. Most of these websites have free signups which give you the most data you would ever need! I am not saying to blindly buy what Superinvestors are buying. But its always good to get more information. Do your own research, look at fundamentals and make your own decision.

Dividends stocks do come with some risk but with right precautions you can avoid the risky one’s and choose the best dividend paying stocks for your portfolio. I created a free guide for you to get started on your journey to living off dividends. I discuss some key ratios, fundamentals, some important resources to look at while deciding to buy a dividend stock. It will show you how to get free access to Morningstar and Value Line reports and how to look at them from dividend point of view. I discuss how you can read most financial news articles from Seeking Alpha, WSJ, Barrons for free even if they are behind paywall! Consider signing up below and get the free pdf version of the insights into dividend investing research and how to keep your dividend income safe.

Check out my complete dividend portfolio of stocks.

Create your own dividend tracking google sheet with graphs and pie charts.

July 12, 2019 2 comments

Investing

REIT Investing: What, How and Why

by Yoda October 1, 2018

As you all know from my previous articles, dividend investing is my favorite style of investing. Although along with that, I also like to make sure my portfolio has different type of assets. One way to do this is via real estate. However not all of us have the money to pay every month for mortgage. Here is where Real Estate investment Trusts (REIT) come in.

What are REIT’s?

A REIT is a company that owns, operates and manages real estate assets around the world and collects rent to make money. There can be publicly traded or privately held REIT’s. The good thing about public REIT’s is that they are required by law to pay out at least 90% of their taxable income in form of dividends. This makes them excellent alternative to just normal dividend stocks. Public REIT’s usually operate in a single industry. For e.g. Data Center, Telecom towers, industrial, storage, healthcare properties etc. This is not a hard and fast rule though. Some REIT’s do invest in all types of properties. There are also some REIT’s which invest in mortgages and make money using the interest payments on mortgage instead of collecting rents and managing properties. They are called mREIT’s but we will only be focusing on Publicly traded normal REIT in this article.

Advantages of REIT’s

Juicy Dividend Yields

Since REIT’s are legally mandated to pay at least 90% of their taxable income, they have high dividend yields. Most REIT’s can pay 4-5 or even 7% sustainable dividend yields. As compared to the average 2-3% dividend of rest of the S&P 500, REIT’s dividends are amazing! These yields are also usually very stable since most tenants are in long term leases which have increases priced every year as per inflation at least. However, check out various ways to ensure/safeguard you keep getting dividends at the bottom of the article.

Instant Diversification

Since we know its very important to diversify in various asset classes in your portfolio. REIT’s help in this regard. REIT’s indirectly make you owner of real estate. They usually have low correlation with stocks so, helps with reducing risk in your portfolio. Plus, best part is you get to be a real estate owner without doing the hard work in maintaining or collecting rents or paying any mortgage. Agreed they do trade like stocks, but REIT underlying asset that produces income is real estate.

Liquidity

Publicly traded REIT’s can be bought and sold just like stocks. So its easier to re balance your portfolio if needed. There are other private platforms like Fundrise and Real Estate Mogul that allow you to invest in REIT’s. But they are bound by extra rules on when you can sell and how much you need minimum to invest. So, publicly traded REIT’s are what I would suggest buying.

Proven long term performance

REIT’s over the last 25-30 years have returned over 11% annually reinvesting dividends. That is a great rate of return for any asset class given the fact we have had 2 recessions in that time. (courtesy NAREIT)

This kind of performance has been almost second to no other group of equities.

Risks/Disadvantages of investing in REIT’s

Sensitivity to Rising rates

In a rising rate environment like today’s, REIT’s compete with other asset classes. For e.g bonds and US treasury rates increase which are usually safer than REIT’s. So a 3% bond would be appealing to people as compared to a 4% REIT with amount of risk involved and REIT usually under-performs. However, having said that if you are a young investor with retirement after a decade or two or more. Then what is there to worry about! Just relax and reinvest the dividends and watch your income from REIT stocks keep growing. Over long term even rising rates usually benefit economy and help in raising rents across most properties and helping REIT’s.

Industry Risks

Most REIT’s operate in a specific industry and are susceptible to business risks weighing down respective industry. For e.g. recent fears over retail apocalypse over slowing sales in 2016-2017 lead to huge decreases in stock prices of most retail-oriented REIT’s. However, if you just focused on fundamentals and bought/invested then, most REIT’s are way more up since then this year.

Tax treatment for you

As we know publicly traded REIT’s are required to pay out at least 90% of their taxable income and they are exempt from paying any income taxes. But then for this reason, you get taxed at full income tax rate on unqualified dividends you receive from REIT. Instead of the favorable tax treatment at lower tax bracket for normal dividend stocks. So, its important to understand what type of investing account they should go in to minimize taxes/eliminate taxes. Yes! its possible to pay absolutely no taxes on REIT’s and get the high dividend yield they offer.

Different Type of REIT Sectors

As mentioned, REIT’s can operate in different industries and business. Type of industry has a lot of impact on REIT’s ability to earn rents. Here are some examples:

Industrial: These invest in making warehouses, distribution centers, logistics center for housing any kind of equipment’s, process, materials required by customers. Some examples include Prologis Inc, Plymouth Industrial etc.
Telecom: These invest in creating tower sites that which network operators use to provide cell services. Some examples include American Tower, Crown Castle Inc etc.
Data Center: These invest in building huge infrastructure for data centers which big tech companies rent. They are usually fitted with features like extra cooling, 24*7 power supply and extremely secure environment. Some examples include Digital Realty, Cyrus One etc.
Retail: These invest in single standing or mall like shopping centers. Some examples include Realty Income, Store Capital etc.
Healthcare: Theses invest in creating hospitals, nursing homes, skilled nursing facilities etc. Some examples include Omega Healthcare Inc, Sabra Healthcare etc.

Other sectors include Office, Residential, Timber based REIT’s etc. You can find more about them here. Its important to know that at any given time, its easily possible that one sector of business is booming and REIT’s involved in that sector will also be booming.

In Conclusion

There are a lot of other factors like adjusted funds from operations AFFO, management etc to look at when choosing REIT’s. Factors to ensuring/safeguarding that dividend yield. Correct investment accounts to buy REIT’s in etc. To know more on how to go about choosing best REIT’s please consider subscribing below for free to help support the blog.

October 1, 2018 0 comments

Principles

Planned Obsolescence: What you need to know

by Yoda February 24, 2018

Following up my article on Instant gratification and how companies use that to make us buy unwanted things, I also wanted to write about planned obsolescence. This is another technique companies use to force us to spend more on items they sell. It’s the art of deliberately shortening the lifespan of a product and at the same time convincing users to upgrade to newer products sooner than what is necessary. This enables the company to ensure customers keep coming back to generate future revenue.

How do they do it and some examples?

Smartphones are the most ubiquitous technology around and most examples I have below are mostly for it, but the points are valid for other lesser ubiquitous products as well.

Launching new models with “supposed” improvements in processor, features etc. every year. Some manufactures of smartphones now launch 2 big flagship smartphones a year! They try to do this with a lot of hype and marketing.
Most manufacturers make best features available only on latest flagship. Even if they are software tweaks or gimmicks, they will only have them on latest flagship so that entices users to upgrade.
Manufactures nowadays delay software updates or in some cases don’t even bother with updates for older generation phones. Apple has also been caught providing updates that subtly make phone slower.
Making it difficult to repair locally or by yourselves. Most manufacturers like apple have started using proprietary screws, nuts etc. These are not available anywhere else so as to make it as difficult as possible to get your phone fixed if it breaks. When you go in through the official channels, for simple fixes you are usually quoted higher than normal prices. They try to force you to buy a new phone outright rather than paying for repairing it.

How to avoid or work around Planned Obsolescence?

Most electronic items are designed with planned obsolescence in mind, so there is no way to completely avoid it. But what you can do is adopt these techniques. It helps you make sure you are not spending too much of your hard-earned money on things that are essentially going to depreciate to 0 within the next 2-3 years.

Don’t buy the latest generation of the gadget. Companies are now coming out with new iterations of their popular products every year. The development/testing cycle has become very short. Its almost impossible to come out with a great reliable product. Most new smartphones including Apple and Samsung phones are riddled with hardware/software bugs. Some or the other bug make it annoying and difficult to use in day to day life. Complaining to customer care doesn’t really solve the issue. Most manufactures take the risk of releasing faulty/untested product to launch it before their competitor and make small improvements in subsequent production of the same phone a few months later after fixing some hardware bugs! They just use as their guinea pigs for testing and guess what we pay them to do so!
Segueing off the previous point, smartphone depreciate at an insane rate. Cars depreciate about 40-50% off the value in 4-5 years. Phones on the other hand are probably worth 0$ by year 4. Most retailers usually give 1+1 offers, 200$ off on the same phone 2 months after they are launched.
Ideally try and buy the last gen phone when you are looking at phones. Usually you get them at a really good rate and there is not much improvements in the 2 generations. Or else try buying the latest gen phone 8-11 months after its released. This way its tested thoroughly and since the newer gen is about to come out, you get a discount on the current phone. Even better is to buy second hand from reliable sellers.
Use your credit cards to increase the warranty of such products. If you buy them using a credit card you can extend the warranty up to 3 years. In case of repairs at least get your credit card company to pay for them.
Go for quality and open source properties of the products. That makes them easier to repair and make them last longer. For e.g. for cars, look at reliability and ease of availability of OEM parts. Buy used so that it costs less and lasts longer and easier to fix. In case of shoes pay a bit more to get better quality which can lost longer than cheaper shoes.

Hopefully this helps you gain more knowledge about planned obsolescence. Now you can use this knowledge to be more careful making financial decisions in your life.

February 24, 2018 0 comments

Principles

Instant Gratification and How to Avoid It

by Yoda February 19, 2018

I wanted to write a little bit on Instant Gratification and how we should try to avoid it. Most organizations and big brands today know about this and use it against us to make us spend more money on day to day items. If you know about instant gratification and can avoid it using the strategies mentioned below, you can make a positive change not just in your financials but also in your health, self-esteem and confidence.

What is Instant Gratification?

Humans are very emotional beings. Some of the most basic emotions humans have are desire, pleasure, happiness etc. We usually tend to forgo our long-term goals to fulfill our innate desire to get some need met quickly and without much hard work. Basically, our long-term goals usually involve lots of hardships, uncertainty, pain, endurance all of which makes our brain very uncomfortable. When we see something that we really like our brain forgoes all reasoning or logic. Our impulsive nature and emotions take control and it becomes difficult to stop ourselves from buying something or doing something that gives us instant gratification.

In the modern world fueled with technological advances it has become easier than ever for companies to help us fulfill our emotional needs by trying to sell us things we(don’t) want and as soon as possible.

Let’s look at some examples to see where we see this in our day to day lives

Social media is all about being in the moment. Dating apps allow you to pick up dates in spur of the moment. There is no waiting needed. You post something on FB or IG and you get instant replies and likes from your friends making you happy! Netflix allows you stream anything you want instantly! No waiting needed. You can binge the whole season in a day and you get your dinner delivered at home in 30 min.
Same day delivery/two-day delivery: Amazon and other companies are pioneering in the field of logistics and are able to deliver you anything you want from a anywhere in 2 days or less. Again, eliminates any need for waiting. I am guilty of this I order a brand-new smartphone and the day its arriving I go home early from work. I am literally waiting for the mailman at my door to deliver my phone tracking almost real time how far away from my house he really is. One delivery is fine but many deliveries later and you are now a trained monkey who keeps ordering online and getting boxes full of crap you don’t need delivered at home in 2 days or less.
Convenience is the name of the game. Price per can of coke is the cheapest if bought at Costco or a big wholesaler and is highest if the same can is bought from a vending machine. Why? because in buying that one can of coke from vending machine you are fulfilling your desire/emotions to be satisfied immediately. Its more comfortable to pay for it rather than to go to a store and buy it.
Newbies and recent graduates join real world jobs and within a year feel like there is no job satisfaction. They complain and then want to switch jobs. No one really wants to go through the hardship and the pain to take time and patience to build a career. And I won’t blame them, they have just been trained to get what they want right then and there.

All this slowly keeps training us to expect anything and everything instantly. This leads us to not have any patience. I recently read an article where in a small child who went to dinner with his parents could not for a minute remove his eyes from his smartphone. His parents understood it was bad manners and tried to snatch away the smartphone from him. Suddenly child became restless, eyes twitched, started feeling angst, uncomfortable etc. It’s as if he had an addiction to smartphone. He could just not stand being away from it and just wanted to go back to his phone. Problem is Instant gratification is only fleeting. Its temporary. Once you buy the latest smartphone or do whatever to feel happy for a few moments, few days later you want something else to make you feel happy.

How to avoid Instant gratification trap?

Delay Gratification! When ordering stuff online put it in your cart and leave it there for a day or two. This forces you to give your brain some time to think if you really need this thing or not. You would be surprised to know how very rarely you would go back and order the item.
Don’t pay for 2-day delivery services. It’s a great convenience to have anything arrive at home in 2 days. Amazon themselves in their earnings release statement note that members who have prime services on an average order twice or more from their website as compared to non-prime members. If this is not an example from horse’s mouth then I don’t know what is.
Have a long-term goal in mind which you want to achieve. It can be financial, or career related etc. I just want to be financially independent as soon as possible. So, whenever I try to buy something I always go back and relate it to my long-term goal. My brain sub consciously tries to force me to not buy something in spur of the moment since I remember my long-term goal.
Try to visualize your goal. When you feel like you want to eat fast food try to think about how healthy you can be, probably avoid obesity, diabetes etc. by not getting the fast food option and going for the healthier option.
Reading this article is also good enough. Once you know about instant gratification and know you must avoid it. Next time you come across making any such decision your brain will sub consciously try to remember about long-term benefits and advantages and will try to sway you to the right choice!

You will find that as you build more patience, resilience and endurance you will be more successful in all parts of your life not just financial.

February 19, 2018 0 comments

Principles Tips & Tricks

Car buying: New, Used or None at all!

by Yoda February 13, 2018

Never buy a new car PERIOD. Its a completely needless expense you will take which is almost guaranteed to drain money out of your pocket. First up let’s look at a graph of car’s value and car loan payments after its bought new. Let’s try and track it along the course of its lifetime. I am mostly using the cars values from public sources and websites and trying to plot them on a graph:

Let’s say you paid 2k$ down for a new vehicle(total price = 20K). We see that the moment you buy a new one and drive it off the lot. Its value decreases by at least 10%. What you will find is its already worth 18K if you try and sell it back to the dealer same day. Talk about a liability taking money out of your pocket! If we keep plotting your monthly car payments as expenses, you can see how your expense on the car keeps going up and up and look at the value of the car as it keeps slowly decreasing year by year. Over years 3-5 its already lost about 40-50% of the value of the new car! All these expenses are just monthly loan installments. We have not even included any car repairs or insurance payments at all in the above graph. So, when you take all those expenses into account, I hope you do realize that buying a brand-new car is just draining your hard-earned money down the hole.
Instead you can simply buy a car that’s 3 years old and still get same level of performance and it depreciates a lot slower as compared to a new car. I personally got a 3-year-old Camry from a third party dealer which has worked out really good for me so far! I still use it and have had barely any problems. Any small repairs I do myself like changing aux ports, filters etc. and haven’t really had to spend too much on any major repairs.
When it comes to lease, what you are paying for is that high rate of depreciation on the vehicle. The 160-200$ payments which look pretty good at the start make you only pay for the fast decreasing value of the vehicle. Once at the end of the lease you decide to say buy the car, the manufacturer will ask you for 300$ monthly payments now not your 200$ payments!
With all this in mind, I can only say that we should realize that a car is a liability in the long run whose value is almost always bound to go down to 0. A car is probably the second largest purchase you will make. In order to be wealthy as we know we need to have more assets than liability! So ideally, we should try to reduce as much as possible of this liability and here are some alternatives:

1. Used cars

Instead of getting a brand-new car, 3-4 years old used cars are often reliable. Cost very less and do not have many expenses at all. I personally got a 3 year old used car which has barely given any problems. It has worked real good so far! I do minor repairs like aux port changes, filter changes myself. Then take it for inspection once a year to see if I need any changes.

2. Public transportation

If you live in big cities like New York, Chicago or Seattle, you should make use of the public transportation system. I even have a few friends in cities like Houston and Dallas that are not that much known for their transportation. But they have been able to make really good use of public transportation for their day to day routine.

3. Uber/Lyft

These days ride sharing apps are all the buzz. Its possible to use these apps and completely give up your vehicle. If you add expenses for your vehicle like insurance, monthly payments and fuel costs. Most of the ride sharing apps have monthly ride passes which are very cheap. They also offer very competitive discounts since they are new. You may be surprised to know sometimes using ride sharing apps is a better option then owing a car.

Let me know in the comments if you have any questions or how your car buying experience went!

February 13, 2018 0 comments

Principles

Must Read Personal Finance Books

by Yoda February 11, 2018

As I mention in the about page on the blog, I find it hard to believe that financial education is something that is not at all taught about in schools/colleges in our education system! I strongly believe this would help new graduates immensely in being better with their finances. Most people who come into possession of money without knowing how to utilize it judiciously, spend it as soon as it comes in. So, to be good at anything just as we go and study/research it, I studied personal finance. Below is a list of books I feel have helped me in my journey so far. I suggest everyone try and read these books for a really good introduction to the world of personal finance and investing. I would also request people to try and go through these books in the order. Since I have tried to put them in a way so as to help you learn things step by step in an organized manner:

So, this book has nothing to do with personal finance or investing at all! However, this book has great tips on networking and becoming more affable. Developing a personality that will help you achieve success in your professional and personal life. This book explains how by caring for people in simplest of ways you can bring about a big change in your personality. Lots of successful people form Warren buffet to Bill Gates attribute their success to this book!

This book by Mr. Clason is a classic! Very old book set in very ancient times. Still teaches the most basic principles of finance. For e.g. how you should pay yourself first, spend less than you earn and invest the rest. How to make your money work for you and not the other way around. In a nutshell all what my blog is about and what I want it to be viewed as. This book teaches seven principles on how to live your financial life by and should be something that everyone should live by!

It dismisses your preconceived ideas about famous millionaires you know from everyday news and media. This book shows some real-life studies conducted on millionaires and expands on the concepts discussed in the previous book by giving examples. It shows how your actual millionaires are just simple frugal people living in your neighborhoods who do not really show off their wealth. Live frugally, spend below their means, invest and have different sources of income. The book really makes it look easy to become a millionaire!

This goes onto explain in more detail how you can make your money work for you. It gives a simple explanation of why poor people spend more money on liabilities. How wealthy people keep adding to their assets and keep increasing their overall wealth. This book really changed my perspective on fancy cars, gadgets. I now usually think very carefully when making a big purchase. Take my time to realize weather I am really buying an asset that will help me grow or a liability that will cost me money.

This book really begins discussing more concepts on investing money in the market to make more money. Hopefully by this time you know about the basics of stock market. The book presents cold hard statistics to prove why investing in index funds is the simplest easiest way to go. I definitely agree with how index investing can keep you up with the market. It doesn’t really need a lot of research on picking these funds. You can setup an account with a broker and buy these funds and you are good to go!

This book takes you from the crazy Tulip market madness in 1600’s to markets in 1960’s and even the dot com boom and bust. This discusses the technical and fundamental analysis people usually do before buying a stock, their advantages and disadvantages. It also guides you on your portfolio allocation strategies according to your age. Also introduces you to concepts in market like Beta, 401k’s, IRA’s etc. It gives you generic personal finance advice. This is obviously power packed with a lot of useful info!

Peter Lynch was able to achieve 29% annual returns for more than a decade and he shares how he was able to do so in very simple terms. There is not much technical jargon in this book. Even then it does an excellent job of guiding you to make individual stock purchases. Primarily based on observing the surroundings around you. Looking at insider buying activity, observing small things occurring in your neighborhood. Using your expertise in your industry to identify future winners!

This book goes into details of how to pick individual stocks in a very specific dividend paying stocks category! It explains how dividend paying stocks are usually the most robust and high performing stocks. Shows they how have outperformed non-dividend paying stocks historically. It also explains what attributes of a stock to look at when deciding whether to buy it or not. It also mentions some pitfalls to avoid when looking at such stocks. This is my favorite strategy and I use it to buy individual stocks outside of index funds.

Guy Spier is a value investor which is another strategy some people use in the stock market to find under values depressed stocks. However, his book discusses not about his strategy but his journey in the markets. How he started as a ruthless Gordon Gekko style investor and later changed after meeting visionary like Warren Buffet. How his idea about not just stocks but also life changed significantly for the better. It’s just a very interesting story. Guy throws some valuable tips on investing and how to have a positive attitude on life!

This book is like a summation of everything you have read so far from my list! Title might make you think its about investing in stock market. But you would be surprised to read about lots of awesome tips on saving money everyday. Some really efficient tax strategies! He also discusses tips in the stock markets. Then goes on to discuss how you can talk to your kids about money. How to make sure they end up in a position better than you! I feel this book is really the pinnacle of all you have learnt so far.

So, the books above have different types of strategies when it comes to investing. I believe no one style of investing is wrong and no one style is completely correct. What you choose to do when you have money to invest depends completely on you and your situation. Maybe you are very young and can afford more risk. You may have time to choose individual stocks wisely and gain returns form that. Maybe are about to retire and you want to do bonds or more fixed return investments and less stocks. Or maybe you just want to get index funds and make sure you at least get the standard market returns!

In Conclusion

My aim was to raise awareness of all the things you can do to make sure you are on your path to financial freedom. To enable you to focus more on things you like and love and not necessarily worry about money. Getting to just know about these things puts you ahead than your peers. It opens your eyes and the mind to the world in a way you have never thought about before!

February 11, 2018 0 comments

Principles

Being Rich vs Being Wealthy

by Yoda February 10, 2018

Many times, people get confused between the being rich and being wealthy. They do not really think there is a difference between the two. But believe me this is the difference between financially independent or chasing money for the rest of your life.

Being Wealthy vs Being Rich

Being Rich is measured in terms of money. We see people around us driving a fancy car, wearing expensive clothing or going on big vacations every few months. We naturally, probably even rightly assume they are very rich. Rich people could have lots of money but may also have lots of expenses. Maybe they have borrowed a lot of money on credit cards, loans to be able to afford that lifestyle. But the question is how long can they continue doing that? Can they continue driving the best cars, taking expensive vacations or living such a “rich” lifestyle for a long time? Does this sound or look sustainable?

Probably for a few people who have lots and lots of money (think multi-millionaires, billionaires) can sustain rich person’s lifestyle.

But reality is percentage of people with that kind of money is very less. Maybe a few million people in 7.2 billion people on planet can only afford to sustain the Rich person’s lifestyle.

Rest of us can earn lots of money over our lifetime but will still have very little when we get to our retirement. We can live the rich person’s lavish lifestyle and show everyone else that we are rich but how long can that last? Will you be able to afford your current lifestyle during retirement? Or will your standard of living drop once your earning power reduces?

So, what are we to do?

Being Wealthy is something measured in time. It basically allows you to live a sustainable lifestyle over a long period of time. It gives you a sense of security on how long your money can last. It’s not just earning money and just working hard to earn your money. Its more about slowly gaining freedom from your work and indulge more in your hobbies. Spending more time with your family or continue working if you want to, but give you a piece of mind. It allows you to make choices and decisions which you otherwise would not have. Basically, let’s say you spend 1000$/month and you have 10,000$ then you are 10 months wealthy! After that you run out of money.

Being Rich doesn’t necessarily translate to Being Wealthy.

How to become Wealthy? Let’s first look at a few technical terms:

Net Worth: All the money you own in cash/stocks/real estate/other assets – the money you owe like loan payments/mortgage payment/debt/student loans

Essentially, Net Worth = Assets – Liabilities

Having a six-figure salary doesn’t really mean that you are wealthy. You only become wealthy by increasing your net worth. There are many Americans today who earn 6 figure salaries but are considered high earning poor people. When most of us try and figure out our net worth, despite earning 6 figure income most of us realize we have too much debt to pay off, too many monthly payments on phones, cars/mortgage to maintain a certain level of lifestyle. By the time we have done paying off every monthly payment all we have left to put down in assets column is almost close to 0$!

However many a times we do not really know what an asset is and what is a liability. In today’s world, marketing and advertising are so good that people easily fall in trap of buying something and not realize it’s a huge liability and a burden to them financially. So let’s look at how we define assets and liabilities with some examples.

Assets	Liabilities
Something that produces more income for you over time, most of the time passively without you having to do anything!	Reduces the amount of money you have in hand. Keeps drawing off money from your account slowly and slowly
Stocks: over the long term (2-3 decades) usually increase in value and are example of assets	Car: every month you pay lots of money to your car company and your insurer to use a car in which you hardly spend more than 2 hrs. a day
Multiple houses: One house to live in and other houses to rent out and earn a passive stream of income from.	1 house: Having just one house is a liability until you pay it off. After you pay it off its just a place to stay, doesn’t really bring in any money
Savings account that earn interest, retirement accounts etc.	Monthly cable, cellphone bills etc.

To become wealthy you need to add more assets and try to reduce liabilities. Over time you will notice assets keep increasing your net worth passively allowing you to focus on other issues.

February 10, 2018 1 comment