Create Cash Generators Just For Investments
One way to add more money is grow your income pie, not just try to cut more expenses from your existing lifestyle. If you have a talent or skill, maybe you could freelance on the side to pick up a couple hundred dollars per month, all of which can get dollar cost averaged into blue chip stocks. Perhaps you work in a factory; can you pick up extra hours? By bringing in more money, you’re funding your investments without touching your ordinary life. That’s very important because it’s more likely you’ll be willing to stay the course as you won’t feel deprived.
This may not seem like much, but if you can manage to put away an extra $10 per day from new business activities or projects, at 10% over 40 years, you’re talking about having $1.6+ million! People aren’t trained to think like that, and our education system certainly doesn’t seem to be giving them these tools. You cannot attempt to put aside huge sums – fortunes are built $1 or $3 at a time. That money compounds, grows, and builds. It’s just the nature of things. An acorn doesn’t become a mighty oak overnight, or even in a few years. It takes time.
Simplify Your Life
This may not seem intuitive, but trust me on this one. For most people, clutter is not only messy, but it has a financial cost. You spend time looking for things, space storing it, lose tax deductions because you don’t have your receipts cataloged or you can’t find the paperwork to mail-in a rebate, require more time for accountants and lawyers to sort out your affairs when something goes wrong, or miss your car warranty, making you pay for repairs costs out of pocket. There is an enormous financial cost to being disorganized.
- Open a set of 26 hanging files, with a tab on each marked for each letter of the alphabet, A-Z.
- Every time you spend money, fill out a cover sheet, staple it to a copy of the receipt along with the original, and file it by the vendor name in the appropriate file. If you spent $97.52 at Wal-Mart, you would highlight the tax deductible items on the copy (some thermal receipts will cause the lettering to disappear if you mark the document), and file it under “W”. At the end of the year, it becomes effortless to track your expenses and turn your files over for tax preparation.
- Throw out the stuff you don’t use. Seriously. Your life will feel cleaner once it’s gone.
- If you have sufficient assets for it to make financial sense, consider consolidating your entire financial life with a single firm. Many banks now have total-wealth services that include checking, saving, money market, brokerage, insurance, home mortgages and equity lines of credit, college funding, credit card, estate planning, and retirement services. At Wachovia, these are under the Command Asset program, at UBS (the United Bank of Switzerland), they are the Resource Management Account, at Wells Fargo they marketed as the Portfolio Management Account, just to name a few.
Learn to Manage the Liability Side of Your Balance Sheet
A common mistake investors often commit is to focus only on the asset side of their balance sheet. The liability side, where the debts are kept, is just as important. A question that we often get is, “Should I pay off my debt or invest?” and the answer is simple: It depends. Even if you have millions of dollars in wealth, if you are fortune enough to have core consolidated tax-deductible Federal Student loans locked in at 5% for the next twenty years, it would probably be a mistake to focus on paying those off due to the cost of capital. After factoring in inflation, the tax savings, and the opportunity cost of investing in attractive assets such as a collection of blue chip stocks, paying this debt off at the expense of investing could result in millions of dollars less wealth over long periods of time.
On the flip side of the Janus coin, it makes absolutely no sense to invest in a regular brokerage account if you are paying 20% on a credit card due to debts you have accumulated in the past. It amazes me to hear people talking about taking vacations, buying Christmas gifts, picking up a new shirt, or going out to dinner when they are swimming in a sea of high-cost debt.
It’s Important That You Reinvest All Dividends
For those of you in the investment-know, this has been repeated ad naseum. The single most important factor in reducing long-term risk when you own a collection of high-quality, blue chip stocks is to reinvest the dividends. Professor Jeremy Siegal has shown in his work and books that this not only reduces the time it takes to gain back losses in down markets, but due to the dollar cost averaging effect, many investors experience better results as they are not tempted to time the market. As he pointed out in his book:
Between 1950 and 2003, IBM grew revenue at 12.19% per share, dividends at 9.19% per share, earnings per share 10.94%, and sector growth of 14.65%. At the same time, Standard Oil of New Jersey (now part of Exxon Mobile) had revenue per share growth of only 8.04%, dividend per share growth of 7.11%, earnings per share growth of 7.47%, and sector growth of negative 14.22%.
Knowing these facts, which of these two firms would you have rather owned? The answer may surprise you. A mere $1,000 invested in IBM would have grown to $961,000 while the same amount invested in Standard Oil would have amounted to $1,260,000 – or nearly $300,000 more – even though the oil company’s stock only increased by 120-fold during this time period and IBM, in contrast, increased by 300-fold, or nearly triple the profit per share. The performance differences come from those seemingly paltry dividends: Despite the much better per share results of IBM, the shareholders who bought Standard Oil and reinvested their cash dividends would have over 15-times the number of shares they started with while IBM stockholders had only 3-times their original amount. This also goes to prove Benjamin Graham’s assertion that although the operating performance of a business is important, Price is Paramount.
Keep Costs Low- and Consider Indexing
When you are starting small, you have a major disadvantage in that your economies of scale just aren’t present. You can’t afford to pay a $12 or $25 commission every time you have $500 to invest; it will devastate your principal meaning there is less money at work for you. That’s one of the reasons that it often makes much more sense for an average, small investor to simply dollar cost average into a rock-bottom cost index fund offered by an industry giant such as Vanguard or Fidelity.
Signing up for these plans can be done on each company’s web site and all you have to do is pick the fund in which you are interested (most advisers prefer low-cost index funds that mimic the S&P 500), and then link it to a checking or savings account so that automatic, regular withdrawals are made at predetermined dates. This takes the guesswork out of managing your portfolio as you are essentially buying “America Inc.”
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