Category Archives: Financial Independence

How to keep Small Items from Killing Your Budget

As 2016 kicks off, it’s time to start planning our budget for the year. We all know that it’s important to pay attention to the top 3 expenses. For most of us, it’s housing, transportation, and food. If you want to see how your spending stacks up to others, here is an article that shows American spending by household income.

Once you’ve analyzed your top 3 expenses, it’s time to start looking at the small items that tend to kill your budget. Here are items you may consider reviewing:

DINING OUT BUDGET

Budget Eating Out

Some people include dining out in the food category, but many included it in an entertainment category. Many people eat out 3-4 times a week and most average $40. By cutting out just one of these dining out experiences, you can save $2,080 for the year.

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AUTO INSURANCE BUDGET

Budget Automobile Insurance

Each year, auto insurance tends to increase. When your insurance comes due, why not search around for a more affordable policy? Look at increasing your deductible from $500 to $1,000. If your car is older and is worth less than $5,000, consider ditching your full coverage policy in favor of a collision policy, it can save a few bucks.

TV BUDGET

Budget TV Budget

Look at your cable bill and decide if you need all of the premium channels. If you’re paying for HBO, Showtime, and other premium stations, consider replacing that with Netflix or Hulu. Many TV providers like Dish and Direct TV offer a better rate for the first year if you switch. You normally have to commit to 2 years, but if you analyze your entire spend over 2 years, it may be a better option to switch. Bundling your TV and Internet may also save you a few bucks.

PHONE DATA

Budget Phone

Many of us buy more phone data that we need. Most carriers have an online portal where you can log in and see your usage. If you are paying for 5GB per month of data and use less than 1GB, you are leaving savings on the table.  Try to reduce your data usage and save a few dollars.

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CONCLUSION

After you’ve looked at your 3 major expenses, drill into the smaller expenses. If you’ve found expenses to trim that I may have overlooked, please share it below in the comment section.

ABOUT THIS BLOG

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

Financial Infidelity: Here’s how to solve it with transparency

You’ve probably heard of couples that share a checking account yet hide credit cards and accounts from one another. Many times this leads to increased debt that the other spouse has no idea about. Here’s how Investopedia defines financial infidelity:

Financial infidelity occurs when couples with combined finances lie to each other about money.

Problems caused by Financial Infidelity

Financial infidelity can cause trust issues, erode respect, and is just dishonest.  In some cases, it can even lead to divorce.

Solution to Financial Infidelity

Financial Infidelity

Great couples keep the lines of communication open. They have common goals, especially when it comes to finances. Couples often strive to travel, retire and enjoy a long life together. Financial Infidelity prevents couples from fully knowing their financial picture and hampers the ability for them to reach that common goal.

The solution is easy: transparency.

By being transparent, a couple knows exactly how much money they have, what their credit scores are, their net worth and how they are trending towards meeting their financial goals.

How to Be Financially Transparent

Here are some tips to becoming financially transparent:

  • Full Disclosure – Meet with your spouse and come clean on any accounts that the other is not aware of.
  • Create Financial Goals – Talk openly about what you would like to accomplish. Your net worth, savings, and retirement goals are all great conversations to have.
  • Create a Budget – Create a monthly budget where you agree on spending for each budget category. We use Quicken for this, but there are many financial tools for this. Personal Capital is a free one.
  • Track Spending Weekly – Each week, evaluate your spending compared to your budget. Quicken and Personal Capital make this easy, as they automatically download transactions that you can categorize and produce a budget report that shows what you spent on each budgeted item.
  • Share your Budget Report – Each week, share your budget report with your spouse. For ease, I email ours to my spouse and then we discuss it. This has a side benefit as it allows us to reduce spending if we are beginning to get out of control on a specific category of spending.

So what does a budget report look like? Here is one I created a while back:

Budget Report

I created this with Microsoft Excel. The values come from Quicken. I could just use the Quicken report but I like the way Microsoft Excel can easily provide a green / red graph if a specific budget item is over or under budget.

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Conclusion

By creating a budget and sharing it with your partner weekly, all your finances become transparent. If you would like a copy of the Excel file I used to create the budget report above, post a comment below and I will send you a copy.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

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Meet Michael Hall: A 38 Year Old Millionaire with Bigger Ambitions

I first met Michael Hall in 2015 and was impressed with his story. He’s a 38-year-old entrepreneur that co-started and sold a software company that vaulted him into the millionaire club. But Michael is much more than that. He’s an avid learner, believes in random acts of kindness, and is a family man.

I asked Michael to share his story with our readers. Although he has accomplished an incredible amount already, he has bigger ambitions as you will learn in this interview.

If you like the interview, please share it on Twitter, Facebook and Google+.

1. Michael Hall: tell our viewers a little about your story.

My name is Michael Hall and I am a 38-year-old entrepreneur currently in hibernation.  I previously started and ran an I.T. management and consulting company for a little over a decade.  After selling the company in 2012, I decided to take a few years off to hang out with my kids (3.5 and 1.5 years old).

Michael Hall

After a lot of soul-searching, I came to realize that my next business will revolve around the success of others.  Thus, I recently launched my own financial/personal development coaching service.  My mission is to help as many people as I can achieve financial freedom (quickly!) while ensuring they are living life with a purpose.  Helping people to step into their full potential is what really excites me these days!

As a related resource, I started a blog several months ago – FinanciallyAlert.com.  At this site, I talk about personal finance, early retirement, and tracks my financials with full transparency.

2. Please trace your professional journey until now.

I grew up in the Los Angeles suburbs and went to University in San Diego (UCSD).  After graduating with an Economics degree, I realized I didn’t know what to do!  So, I decided to flip things around a bit and pursued a career in technology.

After working at an I.T. company for a little over a year, the “Dot.com boom” fell apart.  My company began to implode quickly, so a couple of my friends and I decided to make the jump out on our own.

We grew the business steadily for over a decade, during which time I had the opportunity to wear many different hats, including – Systems and Network Administrator, L3 Support Tech, IT Manager, Technical Project Manager, CFO, and President.

3. Tell us more about your work right now and what made you choose this path.

At the moment, I am a stay-at-home dad which is incredibly fulfilling.  However, I know I’ve been called to do more and had multiple epiphanies during a couple of Tony Robbin’s seminars I attended recently.

So, I recently decided that I’d like to pursue life coaching with an emphasis on personal finance.  I would be so fulfilled to help others grow past their own limiting beliefs.

4. Tell us about the challenges you faced while carving out this path.

I’ve always had a strong faith that things happen for a reason.  But, sometimes it’s harder to see the bigger picture.  When I was selling my company, it was tough because I needed to stick around for the transition to ensure my team was okay, but my heart was elsewhere.  What I came to realize was that I needed to put forth my best effort regardless and extract the juice out of every experience.

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5. How has your journey affected you on a personal level?

The journey has certainly been fun and I can’t really complain, but there were certainly challenging times.  Taking a leap of faith and having the courage to pull the trigger even when the outcome is uncertain is critical to moving yourself to the next level.  Behind this leap of faith are where some of life’s greatest treasures lay hidden.

There is a shortcut however: it’s simply following your heart to pursue your passion and purpose.  Once you figure that out, find other people in the field that have accomplished a lot, and then model their success.

6. What are your goals and aspirations for the future?

I have a big goal of hitting $10M of net worth by the time I’m 50.  I’m 38 now, so I’ve got a little over a decade to get this figured out.  However, being that my next business will be coaching and helping other people, I feel like reaching this goal is much more important than just reaching it for myself.

If I’m truly helping and making a genuine impact on others, it will be reflected in my net worth over time.  In fact, it’s quite exciting!

7. What do you like to do with your free time?

I love to fish in my spare time.  Luckily my whole family enjoys it too, so we’ll enjoy family trips to the mountains to do some stream fishing in the summer.  I’ll also got out on my own to absorb nature alone sometimes.

There numerous lakes in San Diego with a healthy population of largemouth bass.  I also enjoy the challenge of fly fishing in the Sierra Nevada’s.

8. What are some website or blogs that inspire you?

Well, other than this awesome one (weretiredearly.com), I typically frequent sites like:

(My entire list can be found here)

9. What’s your favorite piece of technology you use?

This might sound a bit strange, but it’s my scanner!  Yup, my Fujitsu document scanner has changed my life for the better by eliminating the majority of paper in my life and taking me paperless.  In fact, I wrote a post about it here – How to Eliminate Financial Clutter For Good!

10. Where has been your favorite place to travel and why?

Oh this is a tough one.  I’ve been blessed to travel a lot.  But, if I had to choose one, it would probably be San Sebastian, Spain.  This is located in the Northern coastal part of Basque country.  It has a stunning coastline, great weather, beautiful architecture, and the food here is divine.

It is the second city with the most Michelin stars per capita in the world (only behind Kyoto, Japan).  Life here is good and meant to be enjoyed.  I also love that you can walk everywhere, or take public transportation when needed.  Restaurants and tapas bars are open super late and there’s always something new to feast on (can you tell I love food?!).

11. How can our viewers learn more about your story?

The best place to learn more about my story is on my blog’s about me page.

About this Blog

We hope you enjoyed this inspiring interview with Michael Hall. Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

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Is the Tiny House movement for you?

In the last few years, there has been an increase in people buying small houses. We are talking tiny houses, some as small as 100 square feet but most around 500 square feet. There are even TV shows dedicated to it — you’ve probably seen Tiny House Nation and Tiny House Hunters.

Benefits of a Tiny House

Below are some benefits of going tiny:

  • No mortgage – For about the price you would pay for a down payment on a large house, you can pay for the tiny house in cash. Some homes are as cheap as $20,000, but some can escalate to around $100,000. Imagine not having to write a mortgage payment each month, that could free up a lot of cash.
  • Mobility – Many of the tiny houses can be pulled behind a truck so you can move them from place to place if you get antsy in a particular locale.
  • Low cost of ownership – Being tiny, you’ll probably have a minimal electric bill and it will not cost much to furnish it.
  • Minimalist lifestyle – A tiny house won’t take long to clean and since you won’t have to work as hard without a mortgage, you can focus on other things in life that excite you.
  • Small environmental footprint – Being small, you are forced to consume less and are much kinder to the environment by being much more energy and resource efficient.

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Downsides of a Tiny House

The tiny movement is not for everyone, here are some downsides:

  • Room to breathe – When you restrict square footage to less than 500 square feet, it is easy to feel boxed in and crowded with others in your own house.
  • Less room to work from home – If you work from home, you may find that you are cramped and cannot spread your work out as you did when you were in a larger home.
  • Lack of room for exercising – If you’re accustomed to working out at  home, you will most likely have to resort to outside activities, a tiny house is just too small to workout in.
  • Scary in inclement weather – Imagine weathering heavy rains or a tornado in a tiny home. It’s so light that it could completely come off its footing.
  • Less room to entertain – If you love to entertain in your home, doing it in a tiny house becomes tough. You just don’t have separate areas for people to congregate.

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Some Cool Tiny Houses

Country Living put together a list of 44 cool looking tiny houses, here are some of my favorites:

Tiny House 1 Tiny House 2 Tiny House 3 Tiny House 4 Tiny House 5 Tiny House 6 Tiny House 7 Tiny House 8 Tiny House 9

Conclusion

Are you ready to join the tiny house moment or do you like your bigger digs? Let me know by leaving a comment below.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

 

Financial Independence 101: How to Manage your Portfolio

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance and portfolio management.

Should you Manage your Own Portfolio?

As you begin saving and investing, your total investments will begin to accumulate and compound. This is great, that’s going to build your wealth. When you reach a certain status (maybe it’s after you have $100k invested or maybe even $1m), you will probably begin getting calls from Certified Financial Planners wanting to manage your portfolio.

Is it wise to have them manage it? First, I would like to say that Certified Financial Planners have an incredible amount of knowledge and can be very helpful if you are struggling with specific strategies. Same goes for CPAs. If you can hire them when you need them (for an hourly fee), I would agree that it’s a good idea.

However, most will want to manage your portfolio on a monthly basis and will charge about 1% of your portfolio value for doing this. If your portfolio is worth $1m, it may cost you about $10,000 per year for this service. If you had invested that $10,000 per year for 30 years, you would have given up over $1.2m in gain:

Portfolio - $10,000 per year invested for 30 years

That could be a million dollar mistake. Think about it, who’s got your best financial interests in mind? You or someone else? My guess is you. You work so hard to accumulate the wealth, you should want to know everything you can about personal finance so that you can protect your nest egg.

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How to Manage your Portfolio

Managing your own portfolio is not difficult if you keep it simple. Here are 3 steps that may help.

Step 1 – Invest only in Low-Cost Index Funds

Index funds will diversify your investments with great risk protection. The returns will follow the S&P 500 and it normally produces about 7.5% – 8% per year on average. Open up a Fidelity account and begin contributing money to a few mutual funds. For diversification, I suggest these 4 mutual funds to invest equal amounts in:

  • FUSVX – Invests in S&P 500 stocks (invest 34% here)
  • FSEVX – invests in smaller yet stable companies (invest 33% here)
  • FSIVX – Invests in international stocks, like those in Europe (invest 33% here)

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. You can find similar Vanguard investments.

Step 2 – Add a Bond Fund when you are 5 Years from Retirement

Once you approach retirement age, it will be good to have a bond fund because it will protect your portfolio in years when stocks are not performing well.  Generally, when the economy is booming, stocks do well and bonds produce almost nothing. However, when the economy is in the tank, stock prices fall and bonds do well.

Once you retire, you will need to cash in money to live on, so by having a bond fund, you draw your retirement money from there if the economy is not doing well. When the economy is doing well, you can draw from your stock funds.

So once you are 5 years from retiring, rebalance your portfolio with these allocations:

  • FUSVX – Invests in S&P 500 stocks (invest 25% here)
  • FSEVX – invests in smaller yet stable companies (invest 25% here)
  • FSIVX – Invests in international stocks, like those in Europe (invest 25% here)
  • FSITX – Invests in bonds (invest 25% here)

Step 3 – Rebalance Yearly

As the earnings in your portfolio grow, some of the funds will outperform others. Since you will be reinvesting dividends, you may find at the end of the year that you have more money in one of the funds than others. So it’s a good idea to rebalance your portfolio yearly.

Let’s imagine that at the end of the year you find that FUSVX makes up 30% of your portfolio, FSEVS makes up 20% of your portfolio and FSIVX and FSITX each makes up 25%. In this case, you would simply sell 5% of FUSVX and purchase 5% more of FSEVS, then your portfolio will be balanced once again.

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Read this Financial Book

If you are serious about managing your own finances, I suggest you read a book called “How to Retire Early“. It is written by a friend (Bob Charlton) and in the book he discusses how he and his wife retired at 43 years old. Neither had incredible salaries, they just saved and invested.

The book gives a transparent look into how much they invested each year, what they invested in (they used Vanguard funds similar to the Fidelity funds I suggested above), and how they now manage their portfolio.

More info on the book: http://www.amazon.com/How-To-Retire-Early-Retiring/dp/1482653729

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

** DISCLAIMER ** Financial Information presented on this blog is intended for informational purposes only and is not meant to be taken as financial advice. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances and information may become outdated over time. Before investing, do your research and seek professional advice.

Financial Independence 101: What are Stock Dividends and Stock Splits?

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance.

What are Stock Dividends?

Profit is the amount of money a business has left over after paying all its expenses (revenue – expenses). The goal of most businesses is to make a profit because it adds value to the business and allows it to grow.

Stock dividends and stock splits

So what happens if a business makes a profit? They can take that profit and reinvest some of it back into the business to allow them to build better products and services. But many times, there is still money left over after that. When this happens, the business will normally give part of that money back to those who invested in their stock. This is done with a dividend.

Not all companies pay dividends, especially startups. They normally want to keep all of the profits to reinvest into growth. But well-established companies will often pay dividends.

When looking at your investments, you must look at stock appreciation and dividends to calculate the total return on investment.  For example, if you purchase stock A for $100 per share and stock B for $100 per share and both grow to $125 per share after the first year, your return on investment is 25% on each. However, if stock A also paid a 5% dividend, your return on stock A is actually 30%, so it is a better performing stock for you.

Dividend paying stocks (or mutual funds) can be great investments once you retire because they normally pay those dividends quarterly. When they pay the dividends, you can spend that money on retirement expenses.

What are Stock Splits?

When companies grow and are more profitable, the price of their stock tends to rise. Once the stock price rises over a certain price (normally around $150 per share), companies look for ways to reduce the stock price so that smaller investors can purchase shares. This is accomplished with a stock split.

Stock splits

With a stock split, the company will cut the price of their stock but will give their stockholders more shares. For example, if a company’s stock is $200 per share, they may cut the price to $100 per share but give all their existing shareholders twice the number of shares that they had before. This is called a 2 for 1 stock split. They can also split it by any denomination. In the previous example, they could have done a 4 for 1 split, reducing the cost to $50 per share but giving each stockholder 4 times the number of shares than they had before the stock split.

Conclusion

Now that you have an understanding of stock dividends and stock splits, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 funds to invest equal amounts in:

  • FUSVX – A mutual fund that invests in S&P 500 stocks
  • FSEVX – A mutual fund that invests in small and mid cap stocks
  • FSITX – A bond fund that invests in credit-worthy bonds (note: if you are young and have 30 or more years before you retire, you may consider delaying the purchase of bonds for a while since you will not care as much about market fluctuations).
  • FSIVX – A mutual fund that invests in international stocks (like those in Europe).

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Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

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Financial Independence 101: How are Stocks and Bonds Classified?

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance.

How are Stocks Classified?

Normally you will see stocks classified by market capitalization and industry.

Stock Classifications

Market capitalization (commonly referred to as “market cap”) is how much a company is worth. In other words, it is the number of shares of stock outstanding multiplied by the current stock price for a specific company.  When looking for stocks, you will see 3 types of market capitalizations:

  • Small cap – Companies worth less than $2 billion
  • Mid cap – Companies worth between $2 billion and $10 billion
  • Large cap – Companies worth more than $10 billion

Industry categorization refers to what type of industry the company is in. For example, companies may be in utilities, healthcare, energy, telecom, technology, etc.

Finally, stocks may be domestic or international. Sometimes, domestic stocks do better than international funds (think about the financial issues in Greece), but sometimes international funds fare better than domestic ones.

How are Bonds Classified?

Normally you will see bonds classified by bond type and credit rating.

Bond classifications

Bond types refer to different segments of bonds. For example, companies issue corporate bonds while governments issue treasury and municipal bonds. Additionally, you will see agency bonds, high yield bonds, and foreign bonds.

Credit rating reflects how credit worthy the issuer of the bond is.  It is similar to grades we received in school (A, B, C, and D), with A being the best (meaning the least risky). Within each grade (A for example), you can have varying levels of credit worthiness (A-, A, A+, AA-, AA, AA+, AAA), with AAA being the most credit worthy available. When looking at bonds, here is a general guideline of riskiness:

  • A- through AAA – Not very risky.
  • B- through BBB – Medium risk.
  • C- through CCC – High risk.
  • D through DDD – Very high risk.

Why should you care about Classification?

When investing, it’s a good idea to diversify your portfolio. In other words, if you put all your money in a single stock like Exxon, what happens if the company has a major oil spill and the company goes belly up. You guessed it, you would lose all your money.

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In that example, let’s say you diversified but within the same industry (let’s say you put money in Exxon, Texaco, and Chevron). If an oil crisis happens, you will probably lose money in all 3 of these stocks because they are in the same industry.

Similarly, when investing in bonds, you may not want to buy only government bonds because there may be times when the government defaults on bonds or money for them dries up. So like stocks, it is a good idea to diversify your holdings among different classifications.

Meet Mr. Diversification

Now that you have a good understanding of classifications, you probably figured out that it’s a good idea to diversify your stocks and bonds in different categories so that you spread out your risk. If that’s what you’re thinking, you’re right!

However, figuring all of this out and buying enough different stocks and bonds can be a maintenance headache. Luckily, there’s a solution. It’s called mutual funds and bond funds.

A mutual fund is comprised of lots of different stocks and they may be in different industries and market capitalization. So rather than buy a lot of different stocks, you can simply purchase two or three mutual funds and be fully diversified. You can even purchase stocks that are comprised of the S&P 500 (giving you a really well-diversified investment).

Similarly, you can purchase bond funds that invest in different types of bonds with different credit ratings and this provides the diversification you seek.

Conclusion

Now that you have an understanding of stock and bond classifications, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 funds to invest equal amounts in:

  • FUSVX – A mutual fund that invests in S&P 500 stocks
  • FSEVX – A mutual fund that invests in small and mid cap stocks
  • FSITX – A bond fund that invests in credit worthy bonds (note: if you are young and have 30 or more years before you retire, you may consider delaying the purchase of bonds for a while since you will not care as much about market fluctuations).
  • FSIVX – A mutual fund that invests in international stocks (like those in Europe).

Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. I am an affiliate for Personal Capital, it is a totally free and superior way to keep watch over your investments. I would never recommend anything that I don’t personally use and completely believe in, so give it a try.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

What are bonds

Financial Independence 101: What are Bonds?

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance.

Financial Independence 101: What are Bonds?

Investors tend to talk about buying and selling stocks and bonds. But what is a bond?

Bonds are simply a loan or an IOU, but you serve as the bank. 

Stocks and bonds are the primary ways companies raise money to grow their business. As discussed in our last blog post, when you purchase stock, you are purchasing ownership in the company. When you purchase bonds, you are lending money to the company and receive interest payments on that investment.

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Bonds have a fixed term (called a maturity date), normally 5 to 20 years but companies that issue bonds may “call them” (purchase them back) prior to maturity.

Related Post: Financial Independence 101: What are Stocks?

Who Issues Bonds?

Both companies and the government issue bonds to finance projects. Municipal bonds are issued by city and state governments. The US government issues Savings Bonds, Treasury securities, T-Bills and Treasury Bonds.

Why buy Bonds?

Buying bonds is a defensive play when you are building a balanced portfolio. Generally, the value of a bond rises when interest rates fall and fall when interest rates rise. So normally if the stock market starts to tank, your bond values will rise, protecting you from the ups and downs of the stock market.

When the stock market tanked in August of 2015, the value of my stock index mutual funds tanked but my bond index funds did well. This was my protection. Because we are retired, I draw money from our retirement portfolio every so often to pay for our living expenses. Since our stock funds were down, I could cash in some of our bond funds if I needed cash, and we would not lose money from the stocks that were in decline at the moment.

How do you purchase bonds?

Bonds are sold through brokerage accounts (Fidelity, Vanguard or some other financial institution).  You can also purchase government bonds directly from the US Treasury at TreasuryDirect, but I recommend having an investment account (like Fidelity). Once you have an account, you can buy and sell stock and bonds online. This account will become your portal to financial independence.

Is it risky to purchase bonds?

Bonds are much less risky than stocks but do not normally produce as high of a return. Again, it is your defensive play for when the stock market is in decline. One of the drawbacks of investing in bonds is that they have a set maturity date, so you cannot sell them at will.

Bond mutual funds solve this issue. A bond mutual fund is a collection of bonds (normally hundreds of bonds) that allow you to buy or sell at any time. The mutual fund is managed by a company and you pay a small fee to the mutual fund management company for having them manage it. The amount you pay is called the expense ratio, so look for mutual funds with low expense ratios (I look for those with an expense ratio of .15% or less).

Conclusion

Now that you have an understanding of bonds and financial freedom, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 mutual funds to invest equal amounts in:

  • FUSVX – Invests in S&P 500 stocks
  • FSEVX – invests in smaller yet stable companies
  • FSITX – Invests in bonds (note: if you are young and have 30 or more years before you retire, you may consider delaying the purchase of bonds for a while since you will not care as much about market fluctuations).
  • FSIVX – Invests in international stocks (like those in Europe).

Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. I am an affiliate for Personal Capital, it is a totally free and superior way to keep watch over your investments. I would never recommend anything that I don’t personally use and completely believe in, so give it a try.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

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The American Dream is Alive and Well

The Money Mine is a personal finance blogger who blogs about financial independence and retiring early (FI/RE). Many of his readers are focusing on frugal living to become financially independent so he wanted a different perspective from an entrepreneur that has lived the American dream.

He asked if I would write a guest blog that explains how I built a software company, sold it, and retired.

The Money Mine: The American Dream is Alive and Well

Live the American Dream

Without further ado, here is the article, I hope you enjoy it:

http://www.themoneymine.com/early-retirement-from-the-sale-of-a-multi-million-dollar-business-with-steve-miller/

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

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Financial Independence 101: What are Stocks?

Our two sons are in their final stretch of college and will be graduating next year. College is great but unless you major in finance, you don’t always get a good understanding of personal finance so I will be talking about these subjects in upcoming Financial Independence blogs.

Financial Independence: What are stocks

Financial Independence 101: What are Stocks?

You probably know people who talk about financial independence and are “in the stock market”. They tend to talk about buying and selling stock. But what is stock?

Stock is simply ownership of a company, so if you have multiple stock owners (shareholders), each own a certain percentage of the company and will benefit as their earnings increase through sales and marketing. 

Stock ownership is a key ingredient on your path to financial independence.

Related Blog: Financial Independence 101: What are Bonds?

Do limited liability companies issue stock?

Not all companies issue stock. Small companies structured as a limited liability company (LLC) do not have stock because they don’t want to sell stock to raise money (capital).

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Private versus Public Corporations

Companies that plan to raise capital will structure themselves as a corporation and will issue stock. Corporations can be private or public.

Private corporations don’t sell their stock in the stock market. Instead, they issue shares of stock to the founders and sometimes early employees as an incentive to stick around and help grow the company into something larger. If they later sell the company or go public, their stock can be liquidated into cash at that time.

When we owned our last company, we structured it as a private corporation, with my wife and me owning all of the stock. Once we sold the company, the acquiring company paid us for the stock, allowing us to retire and achieve financial independence.

Once a company grows, it may decide to become a public corporation. This means that it will sell its stock in the stock market so that others can purchase it. You may remember hearing about companies going public (think Microsoft, Facebook, etc.) and pushing key employees into financial independence. This is because they owned stock and when the company went public, they could then sell their stock for the market price on the stock exchange.

How do you purchase stock?

Stocks are sold on the stock market exchanges, with the New York stock exchange and NASDAQ being the most popular. To purchase stock, you simply need an account with Fidelity, Vanguard or some other financial institution. Once you have an account, you can buy and sell stock online. This account will become your portal to financial independence.

Is it risky to purchase stock?

It can be risky to purchase a stock because if the company goes belly up, you lose all your money. Imagine investing in Circuit City, they were darlings of the stock market and after being in business for 60 years, they went out of business in 2009. All of the shareholders lost their money.

The reason to purchase stock is that it can be a lucrative tool to help you achieve financial independence. With risk comes rewards. Since 1900, investors have averaged a 7% return on their stock investments per year. That’s a lot better than putting it into a savings account that returns less than 1% per year.

How can you make stocks less risky?

As discussed earlier, if you invest in a single stock, the company could go out of business and you lose all your money. To minimize that risk, it’s a good idea to invest in multiple stocks so that you spread the risk. But to really spread your risk, you need to invest in 100 or more stocks. This can be time-consuming and difficult to manage.

Mutual funds solve this issue. A mutual fund is a collection of stocks (normally hundreds of stocks) that allow you to reduce your risk. The mutual fund is managed by a company and you pay a small fee to the mutual fund management company for having them manage it. The amount you pay is called the expense ratio, so look for mutual funds with low expense ratios (I look for those with an expense ratio of .15% or less).

What is the Dow Jones and S&P 500?

The Dow Jones is an index that shows how 30 large publicly traded companies have fared over time. Companies in the Dow Jones include 3M, Apple, Boeing, American Express and other large companies.

The Standard and Poor’s (or S&P 500) is an index that shows how 500 large companies have fared over time. If the S&P 500 index goes up on a particular day, it means that on average, the 500 stocks in that index went up as a group. Some may have gone down, some may have gone up, but as a group they are worth more than yesterday.

How do you make money in the stock market?

Stocks and mutual funds are traded on the stock exchanges and you purchase them for a specific price. For example, one of my mutual funds has a stock ticker of FUSVX. It is a Fidelity mutual fund that invests in stocks that belong to the S&P 500. It is currently selling for $69.34 per share.

When I initially purchased this 5 years ago, I purchased it for a much lower price than it is selling for today. In fact, it has provided a 15% return each year, averaged over those 5 years. So if I had bought $1,000 of that mutual fund 5 years ago, it would be worth about $2,011 right now. In other words, I would have more than doubled my money. Doubling your money is the path to financial independence!

This is because the price it is selling for now is higher than when I purchased it. So if you purchase a stock or mutual fund and the price goes up, you make money. If the price goes down below what you paid for it, you lose money.

A final way you can make money with stock is through dividends. You can think of dividends as profit-sharing. If a company does well, it wants to reward its investors (shareholders) with some of those profits. Some stocks and mutual funds will pay dividends as they generate profits. Some will pay monthly, some quarterly and some yearly. The dividends can be cashed out or you can automatically reinvest them into buying more stock, it is up to you.

Dividends will become an important part of your retirement plan once you reach financial independence because they provide passive income.

Conclusion

Now that you have an understanding of stocks and financial freedom, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 mutual funds to invest equal amounts in:

  • FUSVX – Invests in S&P 500 stocks
  • FSEVX – invests in smaller yet stable companies
  • FSITX – Invests in bonds (see related blog post)
  • FSIVX – Invests in international stocks (like those in Europe).

Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

If you would like a visual introduction to stocks, watch this Kahn Academy video.

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. I am an affiliate for Personal Capital, it is a totally free and superior way to keep watch over your investments. I would never recommend anything that I don’t personally use and completely believe in, so give it a try.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog