Looking Back – Buying Stocks during the Crash


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Photo attributed to Flickr. 401(K) 13











I was recently thinking about the early months of 2009.    This was a time of tremendous fear in the stock market and a lot of panic selling.   It was also a time of being constantly barraged with gloom and doom in the news.  I was holding a balanced portfolio of index stock and bond funds.  My asset allocation significantly shifted because of the rapid decline of stocks.

I normally checked the balance of my accounts several times a week.   However, I was very nervous about going online to see the carnage during this time frame.  I kept telling myself …  ”This is a perfect time buy stocks, don’t look at your account balance now”.  My neighbor told me that he could not take the pressure anymore.   He sold all of his stock investments and went to cash.   He wanted to wait to get back into the market when it stabilized.  I really questioned his decision.  Especially since he was 100% in stocks before the crash and only about 10 years away from retirement.

I needed to return my asset allocation back to the desired state.   So, I held my breath and completed the required rebalancing.   I sold bonds and purchased stocks to make this happen.  I initiated multiple purchases.   I will highlight a few …  I was able to buy the Vanguard Total Stock Market index ETF (VTI) in the high 30′s.  I also purchased the Vanguard REIT Index ETF (VNQ) in the 20′s.   Looking back, the purchases in 2009 look like home runs today.    VTI is trending in the mid-70′s this week.    The latest quote for VNQ shows it in the mid 60′s.   So, both ETF’s have more than doubled over this time frame.

I focused all of my additional contributions during the “fear in the street” time period to stocks.   I started to realize this was a “once in an investing career lifetime” opportunity  to purchase stocks at fire sale prices.   So, my stock allocation during this time frame was more aggressive than normal.  After the recovery, I settled back into my normal asset allocation.

The rebalancing and aggressive purchasing during the stock market lows allowed my account balance to recover faster than expected.   I feel very fortunate to have been able to stomach the purchasing of additional stock shares during the turmoil.   Looking back, it has paid tremendous dividends and has helped in the journey to achieve financial independence.


The Power of Paying Yourself First


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Photo attributed to Flickr. Tax Credits












You will occasionally hear the term “Pay Yourself First”.   So, what does it mean?   What are the advantages of this strategy?


Let’s say you are paid $1,000 every two weeks.   A large percentage of people will pay bills out of the $1,000 and then use what is left over for savings or leisure.   The “Pay Yourself First” strategy is all about allocating a percentage of the $1,000 to savings first.  The bills are paid with the remaining balance after the savings is removed.  It’s all about making savings your first priority.

Pay Yourself First Advantages

  • Savings are built systematically through consistent contributions
  • It pushes you to live below your means
  • It’s easy to increase contributions as your income rises
  • It promotes dollar cost averaging into investments

There are many people who view “Pay Yourself First” as one of the golden rules in building a nest egg.  I know this strategy has played a critical role in my journey to achieve financial independence.   I found the best approach is to have the money automatically taken out of my paycheck.    I quickly adjust to living on what is remaining.  A 401k plan is a perfect example of how “Pay Yourself First” works.   The money is taken out pre-tax and allocated to the 401k.

Let’s say you have a goal of retiring in one year.   You currently save 20% of your income using the “Pay Yourself First” strategy.   The good news is you are already living on 80% or less of your income.   This may reduce the amount of income you need to generate in retirement.

The 24/7 Savings Challenge


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Photo attributed to Flickr 401(K) 2013











It’s the time of year for New Years resolutions.   A large number of resolutions center around saving more money or reducing debt.   The percentage of income that is saved annually is an important consideration for wealth building.

Do you want to ramp up your savings?   If so, I encourage you to accept the 24/7 savings challenge.

24/7 Savings Challenge

Set a goal to increase your savings rate over the next 24 months by 7 percentage points.   So, if you are currently saving 8% of your income – - the goal is to increase it to 15% of your income within 24 months.   

If you are up to the challenge, this could  have a significant impact on your net worth over time.  I have read about many investors who achieved financial independence through saving a high percentage of their respective incomes.  The savings increase could be added to your 401k, IRA’s, Taxable Investments or many other investment vehicles.

Where can you find the money to increase your savings rate?

  1. Direct future pay increases at your job to savings.   Try to have the money automatically withdrawn from your check or bank account before you see it.
  2. Cut out certain expenses that are not needed.    Could you save money by bringing your lunch to work?  This money could immediately be directed to savings.
  3. Do you always receive a tax refund and expect one in future years?   You can change your W-4 by increasing the number of exemptions claimed which will improve your take home pay.   Direct this increase in income directly to savings.
  4. Do you already have room in your budget to absorb the 7% increase in savings?  Go ahead and just make it happen.
  5. Do you have a car or credit card that will be paid off soon?   If so, direct the money that was normally going to this respective debt to savings.
  6. Are you paid 26 times per year?  If so, pay your bills with 24 pay checks and direct the remaining 2 checks to savings.

You can ultimately use a combination of these strategies to attempt to achieve the 7 percentage point increase.   It’s helpful to model the impact of the increase in savings.    I located a calculator  on the web that can be used to estimate the impact of increasing 401k savings.

Good luck on your journey to achieve financial independence!

Achieve Median Household Income through Passive Investments


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The US Census data shows the median household income declined 1.5% in 2011.   The median household income in 2011 was $50,054 compared to the prior year results of $50,831.  Please remember this data is always behind.  That’s why you do not see the 2012 results.

I was recently thinking about the following question:

What size of nest egg is required to achieve passive income  at the median household level?


  1. Required Income: $50,054 per year
  2. Annual Withdrawal Rate:  4% (my estimate – feel free to use your own withdrawal rate)
  3. No pension or Social Security payments
  4. No part-time work.

To receive $50,054 in annual income with a 4% annual withdrawal rate, a total nest egg of $1,251,350 is required.    This amount is derived from dividing the $50,054 by 4% (.04).   If you increase the annual withdrawal percentage, the required nest egg declines.

If financial independence is achieved, an individual may decide to not work anymore.   This could reduce the amount of expenses incurred.   A few examples include no more saving for  retirement, a reduction in commuting costs and reduced taxes.    However, there are other situations which may increase expenses if a person is no longer employed.   It could include the possibility of increased health care costs and an increase in travel expenses (Hello Hawaii !).

It’s important to consider the definition of median as in “median household income”.   It technically means the middle value.   Approximately one-half of the group is lower and one-half of the group is higher than the median.    This translates into a lot of US households  living on less than or greater than $50,054 per year.

If you are receiving pension and/or Social Security payments, please feel free to subtract the total annual income received from the $50,054.   This will allow you to reduce the total nest egg required in the calculation.

Happy New Year !



Investment Rebalancing


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It’s been a good year for my stock investments.   I know  this because my asset allocation (60% stocks/ 40% bonds)  is out of balance.   This means either my stocks went up, bonds went down or a combination of both.   In my case, the primary driver for the asset allocation shift was the growth in my stock investments.  The stock portfolio represented greater than 60% of my nest egg.

I previously made a decision to rebalance investments twice a year.    The first rebalance occurs mid-summer close to my birthday.    The second rebalance happens the last week of the year.   I completed the rebalancing process this morning.   It was a little over an hour to bring the investment allocations back in line to the desired 60% / 40% split.   I sold some stock index ETF’s and purchased bond index ETF’s.  In addition, I adjusted my US/International/REIT stock allocation split back to the desired state.

Rebalancing is an important exercise for investors.   It’s amazing how asset allocations can change quickly over time.   An allocation can rapidly move to a place that is outside of your desired risk tolerance.


Let’s say Pete is striving for a 50% stocks / 50% bonds asset allocation.   His portfolio balance is $10,000.   Goal state for this asset allocation is $5,000 in stocks and $5,000 in bonds.   However, the portfolio now shows a $6,000 balance in stocks and $4,000 in bonds (60% stocks / 40% bonds).    To bring this back in line, Pete will need to sell $1,000 in stocks and purchase $1,000 in bonds.   This will bring his asset allocation back to the desired 50/50 split.   Pete will be selling a percentage of his stocks after the increase in value.   

I’m a huge fan of rebalancing investments during the year.   The primary reason is it drives the right behavior.   My goal is to buy low and sell high.   The rebalancing I did today allows me to sell a portion of my winners (stocks) and buy bonds.

A difficult question to answer is how often to rebalance.   If an investor rebalances too frequently, there is a possibility that stocks may continue to go higher and he/she may lose out on the additional gains.    If an investor does not rebalance enough, the asset allocation can become way out of whack.   I have decided rebalancing twice a year is the optimal frequency for my portfolio.


What is Your Financial Independence Hourly Wage?


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One measure of success in a career is the hourly wage that is earned.   The majority of us begin our working life at a less than desirable pay rate.   I still remember being 16 years old and making minimum wage at a popular fast food restaurant.    If all goes well, the hourly wage can increase over the years as we gain more experience, education and knowledge.

There are several ways to achieve financial independence in life.   One common path is to invest money over a working career.   The majority of us will invest in a combination of stocks, bonds and cash based on our risk tolerance.   The investments may be in the form of retirement and/or taxable accounts.

Let’s say you have diligently invested over your life-time and are ready to retire.  One difficult question to answer is what percentage of income can be withdrawn from a nest egg each year without running out of money.  A quick google search of this question will provide many different opinions.  One answer that comes up frequently is an initial withdrawal rate of 4% with future increases for inflation.

There is an exercise that can be completed that will provide a different perspective on financial independence.   This can be completed no matter where you are on the financial independence journey.   The first step is to add up all of your investments and savings to understand your total nest egg.    Multiple the nest egg by an annual withdrawal percentage you are comfortable with.  This will provide the annual income provided by the respective nest egg.   The next step is to take the annual income and divide it by 52 weeks.   You can then take the weekly income amount and divide it by 40 hours in the week.    This will provide you with an estimated hourly wage the nest egg will provide.    This is passive income that does not require your labor.   You don’t even have to leave the house to receive this income.   The one caveat is investment returns are volatile and do not always go as planned.


Donna is 65 years old and has a nest egg that totals $400,000.    She is going to assume a 4% withdrawal rate which provides an annual income in the first year of $16,000.   If you take the $16,000 annual income and divide it by 52 weeks it provides a weekly income of $307.69.    The last step is to divide the weekly income of $307.69 by 40 hours which provides an hourly income of $7.69.   Very Nice !

Another way to view the hourly wage is to also factor in pension payments, social security payments or any other passive income sources.   Good luck on your financial independence journey !



Annual Net Worth Review


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As we approach the end of the year, it’s a good time to calculate your Net Worth statement.   This involves adding up the value of your assets in one column and taking the same approach for liabilities in a separate column.    The difference between your assets and liabilities equals your Net Worth.   This number can be positive or negative.   Let’s review a hypothetical example:


Tom has a house that is valued at $100,000 with a mortgage of $80,000.   He has $100,000 in retirement accounts and $10,000 in cash savings.   Tom recently purchased a car and has a loan balance of $20,000 but the actual value is only $18,500.    He has $5,000 in credit card debt.

In this situation, Tom’s Net Worth is $123,500 which is the difference between his assets and liabilities ($228,500-$105,000 = $123,500).    Assets:  $228,500 (house, retirement accounts, cash and car value)  Liabilities:  $105,000 (home mortgage, car loan and credit car debt).

If the goal is financial independence, understanding and closely monitoring Net Worth is an important step.   It can definitely impact the decision making process if you are attempting to maximize Net Worth.   Let’s say you are in the market to purchase a home.   You find two houses that you equally like.   The only difference is one home is priced at appraised value and the other is priced 10% below it’s actual value.   If you purchase the home that is priced at appraised value your Net Worth should technically remain unchanged.   The increase in assets and liabilities will cancel each other out.    However, if you purchase the home that is priced at 10% below appraised value there is an immediate increase in Net Worth.   The assets will increased by a higher percentage than your liabilities.

A good exercise to complete on excel is to project out the estimated value of your assets in future years.    There are many calculators on the web that can help you with the future projections.    You then can also project out the future decrease in your liabilities in future years (i.e. paying a mortgage down, credit card debt etc.).    This will allow you to forecast future estimated Net Worth amounts.   There is a lot that can change in the future but this can help you see the potential of your efforts.   This approach can also be used to model the potential impact of increases in your saving amounts.





Investment Flight Plan


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There are times in life when our investment contributions may have to slow down.   One example is when the college fund for our children is inadequate to pay the private university education.   In this situation, we may decide to use current income to assist with the educational expenses.   There are many other examples to consider including job change, job loss, relocation and divorce.

One strategy to consider when difficult time periods are experienced is to examine your investment flight plan.   Let’s review a hypothetical example:


John has been working for one company for 20 years.   He has been saving in the company 401K every year and also invests in an IRA account.   John is 45 years old and recently learned his job is being eliminated because of the loss of a major client.  He has saved $250,000 in retirement accounts and has a 6 month emergency fund.  John is also receiving a severance package the is equivalent to 6 months of his salary.  It’s a difficult job market and a total of 11 months pass before John finds an equivalent position.   


Let’s talk about John’s flight plan and assume he wants to retire in 20 years at age 65.  In this example, let’s forecast into the future and assume John earns an average of 8.5% per year on his moderate portfolio of stocks and bonds.  What happens if John does not make any more contributions to his 401K or IRA over the 20 year period?   An average of 8.5% return will leave John with an ending balance at age 65 of approximately $1,278,012.  Over 20 years, John’s initial $250,000 doubles to $500,000 and then doubles again to greater than $1,000,000.  This of course does not take into consideration the impact of inflation or the volatility of returns during this time period.  However, it’s a great exercise to go through to help understand the long term nature of investing for financial independence.

In this situation, John’s emergency fund and severance package helped him weather the storm.   He could certainly fire up the retirement account contributions again after starting the new position and strive for an even greater ending balance.


Increasing Annual Savings


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Are you looking for a way to increase your 401K and Roth IRA saving rates incrementally?  I remember graduating from college in the early 90′s with a degree in finance.  One of my primary goals was to focus on becoming financially independent at some point in the future.  I understood the power of exponential growth which can occur over time through compound interest.  The professors spent a lot of time making sure we understood this concept.  I also was aware of the importance of starting early.   The money saved in my 20′s could really pay off later in life.

The income for a new college graduate in the early 90′s was OK but not stellar.    It was a post recessionary time and the job prospects were not great.   I was able to locate an entry-level position with a Fortune 500 company.   This paid the bills but left very little for savings.   This prompted me to think longer-term about how to reach annual savings goals.

The company offered a 401K plan to employees .   There was a short waiting period before I become eligible to start the program.   I started with a deferral percentage that was affordable at the time.   If you deferred 6% of your income, the company provided a match of 3%.   I quickly recognized this provided a 9% annual savings rate with only 6% of my pay being withheld.   I also learned that reducing my income by 6% pre-tax did not reduce my take-home pay by 6%.   My take-home pay was decreased by a smaller percentage because of the tax benefits of the deferral.

Over the years, I was able to receive pay raises on an annual basis.   I also received multiple promotions with the company as my career progressed.   I strategically utilized merit pay raises and promotional amounts to increase the amount of money deferred in the 401K.   For example, I would bump up my 401K percentage from 10% to 13% if a three-percent annual increase was received.   This was exciting because I was now saving 16% of my income (13% deferral + 3% company match).  I then reached a point where my annual 401K deferrals were at the maximum amount.   It’s amazing how quickly your annual savings rate will grow by bumping up your 401K deferral percentage each year.

I recognized that maximizing my 401K did not leave a lot of additional discretionary income to invest.   This become especially true after my spouse and I purchased a home and started having children.  I wanted to invest in a Roth IRA but did not know where the money was going to come from.

I realized that my employer paid me every two weeks which worked out to be 26 pay periods in a year.  I had a set up where one pay period each month was used to pay the mortgage payment.   The second pay period in the month was used to pay all of my remaining bills.   So, a total of 24 pay periods per year was enough to handle all of my expenses.  I used the two extra pay periods per year for funding Roth IRA’s for myself and my spouse.  The beauty of this approach is the two extra pay periods normally represents approximately 7.69% of your annual pay if you are paid 26 times per year (2 divided by 26).  After you consider taxes, the percentage you actually receive is lower but it still can add to your bottom line annual savings amount.

This did not fully fund the Roth accounts but it was a great start.  I also utilized any additional “found” money to fund the Roth IRA’s.   As pay increases came my way, I increased the Roth IRA savings until eventually reaching the maximum amount.

At this stage in my life, I was saving in excess of 20% of my annual income.  It took several years to accomplish but I was used to living on my post-savings income.   This provided a solid foundation for compounding to begin.




Mortgage Creativity !


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Many people are looking for ways to pay off a mortgage early.  Several years ago, I was at a car dealership waiting for my automobile to be serviced.  I started talking with an older man who was also waiting on his vehicle.  I learned he owned several rental properties in the area to generate  income.   The conversation shifted to the different ways a person can pay off a mortgage early.   I was certainly familiar with the common approaches which include biweekly payments or paying an extra payment each year.  However, he referenced an approach that I was not previously aware of.

Let’s use the following mortgage amortization schedule as an example.   It reflects a 30 year mortgage on a $150,000 loan at a 4% interest rate.

Payment Principal Interest
Aug-12  $716.12  $216.12  $500.00
Sep-12  $716.12  $216.84  $499.28
Oct-12  $716.12  $217.57  $498.56
Nov-12  $716.12  $218.29  $497.83


The gentlemen indicated a person can pay off a 30 year mortgage in 15 years by taking the following steps:

  • In August, pay your normal payment of $716.12 plus the principal amount reflected in the next (September) payment.
  • In this situation, you would pay $716.12 plus the $216.84 which represents the next months principal amount.
  • He told me, you just technically paid the August and September payments.   It took me some time to grasp this concept but I then realized he was right.
  • You can then take a highlighter and mark through the August and September payments.
  • In September, you would then pay the normal payment of $716.12 (represents October payment on amortization schedule) plus the $218.29 principal amount for November.
  • You would then highlight October and November as being marked off the list.

You will notice the amount of extra principal you have to pay each month will increase as you move further down the amortization schedule.   This can work out nice for a person who has an income that increases over time.   The gentleman told me if you follow this schedule you can cut a 30 year mortgage to 15 years.    You can also change a 30 year mortgage to 10 years by paying the normal payment and the next two principal amounts (representing the next two months).

It’s a good idea to periodically obtain your mortgage balance from your lender to confirm it matches up with your own records on the amortization schedule.

Good luck on your journey to achieve financial independence ! See this source


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