Category Archives: Personal Finance

Getting Funds for Investment (part 3)

It’s great that our financial market system is set-up to allow everyone the opportunity to build wealth. All the investment vehicles were tried and tested; some were more successful while some failed. We all know the financial market, particularly the stock market is made for the wealthy so getting the funds to invest is not a problem. But what about the 99% of us?

No More Coffee
No More Coffee!

We all received all kinds of advise on what to do with our money. Buy a house, invest in stocks, or maybe even invest in baseball cards. All of these require the funds (or disposable income) in order for them to become reality. Disposable income is defined as income remaining after deduction of taxes and other mandatory charges, available to be spent or saved as one wishes.

The question is how does anyone come up with the extra money when there are multitude of expense items that require our attention. I have the same challenges every month for the last 20 years. On top of the mortgage payment, there are utilities bills, groceries expenses and unexpected expenses. Over the years I learned of a few tricks that have helped me to come up with enough liquid asset that allow me to put some of them in investments. I hope this blog will help anyone who just started to earn wages to think about their future and how to come up with enough liquid asset to invest.

There are myriad of articles already exist out there showing strategies how to save money. I may repeat some of them here but mostly I will focus on how to prioritize the savings so much so that you don’t even know you are saving money. There will be some efforts and sacrifices made but they are for the benefits of your future. Thus, I would highly recommend that would consider some of methods in this blog.

Automatic Investment in 401k Retirement Fund

Most medium size and large companies offer 401k to their retirements. Some would offer the plan while others would match your contribution. If your companies offer matching contribution, you will want to max out the contribution and get the “free” money. The money you save in the retirement plan will continue to grow as long as the market continues to grow. The money you save in the plan will never go into deficit if you plan to withdraw it when you retire.

What happens if you have emergency need of cash? You can borrow against the retirement plan and repay it within certain period. If you fail to pay back the loan, you will need to pay a penalty and a hefty tax bill. Hence, any money you save in the retirement plan is considered “untouchable”. The good news is it will continue to grow and you never have to worry about it.

Annual Bonus and Tax Refund

At the end of every calendar year most companies will award bonus to their employees. Certain companies such as investment banks could award bonuses in the hundreds of thousands while some small companies would only give a few hundred dollars. While these are free monies, they are never actually “free” because they are usually taxed at a higher bracket.

Americans who start to earn wages are required by law to pay income tax to the federal and state governments. If you plan your tax correctly and input W4 appropriately, you should be able to get tax refund. Most Americans think the tax refund is a big payout and it is free. Instead of saving the refund, they will go on a spending spree. Tax that is being refunded to you is not free but your very own money. It is merely an over payment of taxes the previous year and the governments are just paying you back.

Instead of spending the bonus or tax refund, put them in a high-yield savings account, save them in emergency fund or invest them in either Roth IRA or traditional IRA. Better yet, if you have extra liquid assets available buy reputable equity stocks that pay dividends. These stocks will continue to generate passive income.

Automatic Deposit

Once you started working, most companies would encourage their employees to set-up a bank account because the wages would be automatically direct deposit to the bank. There are hardly any companies would pay wages in cash to cut administrative cost. Banks today are quite sophisticated in helping customers managing their money. On top of deposits, withdrawals and paying bills, most banks has a feature called “automatic transfer”. Everyone should use this feature to set up a periodic automatic transfer the wages you earn to a separate account. For example, after budgeting all my expenses, I was able to transfer $150 every pay period from my checking to my money market account. Instead of performing this task manually, I set up an automatic task that will transfer the funds twice a month. This method becomes so ingrained in my monthly budget that I hardly see the money but I know it is there should I ever need it.

A Penny Save is a Penny Earned

This is an old saying that is still true today. However, for this example, I’m not referring to saving your hard earned money in a savings account, which hardly pays any interest. I am referring to the actual pennies and changes you receive after a purchase. When we go our purchase anything with cash, it is extremely likely we will have changes in many denominations. And I can assure you that these coins will never be used again because they are real inconvenience and heavy to carry around. Save these coins in a container at home. Believe it or not in no time the coins will add up. Before the pandemic hit, my coins could easily amount to over $100 in 3 months. Once a year bring the coins to the bank and transfer it to an investment account.

Shop Smartly

Ever wonder why the brick and mortar stores are closing as fast as dead flies? Because more and more people are now shopping online. The benefit of purchasing online is it allows us as consumers to shop smartly. Apps today, such as Amazon or the Honey, enable us to look for deals before making any purchase. In turn, they allow us to save.

My family makes a lot of purchases online. If we find something that we like in the stores, we usually do not purchase the items right away. We would search Amazon to look for ratings and the price. The ratings will let us know if the items are reliable or if the price is right. This method allows us to cut our spending drastically. Another benefit is by not buying the item immediately allows to reconsider if the item is needed. It makes us question the need and want of the item thus further saving more money.

Eating Out

Eating out is one of the biggest expenses of any household. We are paying a price for the convenience of not cooking. My family used to eat out at least 4 nights a week. We gradually reduce it to 2 nights a week. The Coronavirus pandemic totally eliminate any chances of us eating out and I see our monthly expenses reduced by a third. Because of this I’ve been able to move the money that we did not use to the stocks.

I am going to use eating at a sushi restaurant as an example of price comparison. A roll of California roll at a restaurant costs between $5 to $8. On a sushi night, I would spend less than $15 in ingredients and make about 20 rolls of sushi. If I buy 20 rolls of sushi at a restaurant will probably cost me about $150 (taxes and tips included). That’s a $135 in savings!

No Gourmet Coffee

Prior to the pandemic hit I would see literally 20 to 30 people waiting for their coffee at Starbucks coffee. The prices for a beverage range from $3 to $8. There is a perception that Starbucks coffee are better then regular coffee and people are willing to pay premium for a cup of coffee. However, what people don’t realize that the coffee that they are getting is a big chunk of their monthly expenses. For example, using an average of $4 a cup of coffee you will have to pay about $120 a month to satisfy your cravings. Starbucks now offer k-cup coffee that you can make at home and they usually cost less than $1. That’s a $90 a month in saving that you can use to invest in.

I could go on forever to find funds to invest. At the end it is up to each one of us to take the initiatives to start saving and less spending. I am interested to hear from you of any other tips that work for you and help savings for the future.

Investment Priority (Part 2)

Grow Your Money

“Investment” is an umbrella term of giving your hard earned money to someone else in hope of multiplying the value after a set period of time. Investment includes many options. The question is what should you invest in?

As a disclaimer, I’m not an expert in financial markets and I’m not a Certified Financial Planner (CFP). The message that I’m conveying today is based on what I learned over the years and based on some of the research that I’ve done. Investing comes with risks and there is no guarantee that a positive return can be gained from investment.

The first investment vehicle that I was exposed to was 401k retirement plan from Arthur Andersen. As I started to pay for my taxes, I learned about Individual Retirement Account (IRA). Over time I was exposed to stocks and bonds. There were others such as Foreign Exchange, Options etc. The amount of investment vehicles that are available are mind boggling. How do we expect regular people like us to understand what they are and what they do.

The purpose of this blog is not to cover all investment vehicles but to highlight the minimum types of investments that everyone should invest in. Additionally, my goal is to clear up some of the confusions that many young people have when they were first exposed to investing their money. In the sea of investing options, which boat should you take that will bring you to your dream sunset? The bigger question is which boat will not sink because you put too much weight on it and which one will stay afloat.

I still remember the first day of working at Arthur Andersen. I was given the employee handbook along with employee benefits. One thing stood out was 401k retirement plan that Arthur Andersen was offering. The company was providing matching contribution up to 6% and the contribution was vested immediately. Two terms stood out, “matching contribution” and “vested immediately”. I had no clue what they meant but they peaked my interest. Upon further research, I realized that I can save for my retirement without lifting a finger and I was getting free money from the company. Additionally, the amount that I invested in the plan was immediately put into the market and start growing.

I thought that by investing 401k retirement plan that I would have enough to retire when I reach 65. Unbeknownst to me that 401k will only generate a very small portion the retirement income; I will need supplement income to enable me to retire comfortably. We live in the greatest age of financial markets where there were many before us thought of this question. In the past century many economists came up with all scenarios and many experts in this field came up with all kinds of solutions. The end results are new investment options were created. The government recognized this and several acts were enacted to assist retirees when they retire.

I began to dig a little deeper to find out what are other investment vehicles that will fulfill my retirement needs. I realized that investing is not only based on the types of investments but should also be based on age and risk tolerance. For example, if you are in your 30’s your risk tolerance will be higher then people who are in their 50’s. You would be willing to invest in stocks which carry higher risk of volatility than in bonds. Higher risk such as stocks usually generate higher return than bonds.

There is no magic numbers when it comes to what are the best combinations when it comes to investing. There are so many books and articles written on this subject. Some investors would prefer to invest heavily in stocks while some would prefer bonds. While some would invest everything in 401k only. And there are others who would risk everything in high return/high risk investment.

I started to deal with this question only when the economy collapsed during the housing bubble of 2008. I saw my 401k retirement plan dropped half of its value. I saw the stocks options that I received from my company at that time, Citigroup, dropped from $54 to $1. That was the worst time of my life and I realized that I may have to continue to work even when I retire.

To minimize the risks of losing money and to ensure stable return, I found out that I need to mix my investing strategies. I’m not 100% there yet because I continue to prioritize my personal finance. However, I do suggest that you prioritize your investment as follows:

  1. Invest in tax deferred qualified 401k retirement plan – Most companies today no longer offer pension plans because they are costly to companies to invest and maintain. However, most large companies offer 401k retirement plan. If you are working for a company that offer 401k retirement plan and also offer matching contribution, you should invest at the minimum to obtain the contribution from the company. They are considered “fringe benefits” because they are considered below the line expense item in the company’s balance sheet. This benefit is hidden from employee compensation package. If the employees don’t use it the company will just take it away. If possible, budget permitting, try to invest the maximum allowed by the IRS.
  2. Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement.  You will need to open an account and buy “shares” of the Roth IRA. The difference between Roth IRA and traditional IRA is you have to pay taxes when it is invested. You don’t have to pay taxes when it is time for retirement. Roth IRA and IRA are no offered by the companies that you work for. This type of investment can only be purchased through banks and investment companies. There are certain conditions that must be met for anyone to qualify under IRS rule.
  3. Traditional IRA is the next best thing. It is very similar to Roth IRA but the only difference is you will have to pay taxes when retirement comes and you have to sell it. The amount of tax depends on the amount of value of the IRA and the tax bracket when it is your retirement age. It could go both ways. There is a likely chance that the tax could be in your favor or you will be stuck with a high tax bill. Traditional IRA is available for everyone but not Roth IRA.
  4. The Exchange-Traded Funds (ETF) is also considered index funds, is basically a collection of a list of company stocks. It is also very similar to Mutual Funds but there are some fundamental differences. ETFs can be traded in the open market and most if not all ETFs pay quarterly dividend, which is a passive income. The major difference between ETFs and equity stock is the risk is lesser. The likelihood of ETF’s value drop to $0 is minimal while individual stocks could be easily wiped out depend on market condition.
  5. Company stocks which is also called equities is a lot riskier than bonds. The return generated from stocks are usually higher than bonds but they come with inherent risk of volatility. The movement of stocks depend on market conditions. However, history of stocks have been showing a lot more ups and downs. There are stocks that pay dividends on a quarterly basis while there are some stocks don’t. This is where I find investing in stocks appealing. I consider investing in stock to legalized gambling. You have to pick the right hands to win or you could lose all.
  6. My preference to stocks over bonds is because of their higher return. I would consider bonds to be a longer term investment. If you are still young, you may want to invest a small percentage in bond to ensure that you have a diversified portfolio. The bond will continue to grow and hopefully by the time you retire there is a large sum of money waiting for you. As you close to retirement, you would move a larger percentage into bonds to minimize the volatility of stock market.

There are other investment vehicles that I would not be discussing here as this will require a lot more than a blog. The recommendation that I proposed above should be considered closely by all because it is a start for a better future. The market condition today is ripe for the taking and history suggests that it will continue to go up. So don’t wait and start investing. You may ask where to come up with the money to start investing. Subscribe to my blog because this will be my next subject: how to save enough to begin investing?

Learn to Avoid the Biggest Mistake of My Life – Start Investing (Part 1)

There are certain things in life that you know you should have done but didn’t. When you realized that you made the mistake (or in this case not correcting it) it was too late because the time had passed and the ship had sailed.

Before you jumped into any conclusion, I’m not referring to something that I did and I regretted my decision. In this case I am referring to something that I didn’t do and now I regret it. I’m alluding to investing early for retirement and I’m hoping that anyone who reads this post and heed my advice and start investing.

I realized I made this mistake about 5 years ago when I noticed that I hardly earn any interest from all the money I saved in my savings. In fact, I have a large sum saved in the Preferred Money Market Account, which is supposed to pay higher interest than the regular savings. If I recall of the $50 K that I have in the account I earned less than $150 in interest. That got me thinking if I made the fatal mistake by putting everything in savings.

After I started working full-time I always put the money that I don’t use in savings. This is something that we learned at a very early age that we save all our money in bank using savings account. For the next 20 years working I continue to put all my money in the same account and it felt good seeing the balance keep adding up.

And was I wrong… I realized soon enough that I have been giving my money to the bank for use (that’s what bank does – it takes the money that lend it out or reinvest it) and I was not getting my fair share. Granted that this is not the only bank’s fault but also the economy itself. Banks will only pay the interest rate based on what the Federal Reserve Bank dictate. In turn the banks will use the government’s rate and unilaterally pay a much lower interest rate to the customers. I’m not an expert in this field so I won’t attempt to explain any further.

For the last several years I’ve been doing some reading and researching during my free time (like almost never). I read several articles on how many young people in their mid-30s become millionaires. In each articles they mention only one thing, “investing”.

For the purpose of this post, investing refers to buying stocks or bonds in the financial markets. I’m not referring to investing for retirement such as 401K or IRA because it is a very different subject. Investing comes with certain risks because the market can be volatile. You could invest $10 thousand today and you could lost all of them tomorrow.

I am currently reading a book titled “Quit Like a Millionaire” by Kristy Shen and Bryce Leung. The book talks about how to become a millionaire by investing smartly and find loopholes in the system. They are able to make their first million and quit their job. Using the income they earn from their investment they are able to travel the world 365 days a year.

Obviously I do not see myself quitting my job and just focus on investment. There is an inherent risk in this idea. Additionally, I have a family that I need to take care so quitting my job is out of the question. My short-term goal is to be able to earn passive income by investing in stock market. Ultimately I want to be able to retire comfortably without worrying if I am every able to pay my electricity bill.

As a declaration, I am not a financial planner nor a stockbroker. I am not in the position to give any investment advise. It is better to leave this to the professionals. In this post and subsequent post, I want to highlight several things I learned that I believe will be beneficial to anyone who wants a better financial outcome other than what Social Security can provide us.

Invest Early

Investing in stock market 5 or 10 years ago was reserved for the rich only. Anyone who wanted to invest in the stock market would need to have a large sum of money saved and would willing to pay a high commission to stockbrokers. The incentives to invest our hard earned money were not there.

Today is very different. New ideas and technology are popping up everywhere. That give rise to business model that allow regular people to invest in stock mark for free. The app that I use is Robinhood. Buy and sell stocks are easy and commission free. Hence, there is no reason not to invest. Obviously, before buying any stocks please do your homework and ensure you are not investing in risky stock.

Each stock have metrics and numbers to assist buyers in make the necessary determination. For someone who is new in stocks, I would highly recommend that you invest in reputable companies such as Microsoft, Apple or Disney. Keep in mind that while some companies are reputable, they may not do well in the market. For example, Macy, JC Penney and GE are some of the companies that you should stay way from. Keeping abreast of current news will help.

Next post I will touch on what to invest and what it means by diversification. Subscribe to my blog so you don’t miss any of my post. If you are interested in this subject I highly recommend that you Google it or do a deeper research.