Market Timing vs. Dollar Cost Averaging

I was recently watching one of my favorite Youtuber’s, Graham Stephan and in his video he mentions what comes up quite often in investing and that is should we time the market or dollar cost average. What is the right choice for you? or for most?

This is also an important question for individual investors. Especially when you have a decent chunk of cash to invest. How you decide to invest can have serious consequences…go all in at the wrong time and you risk losing it all. But if you sit on your cash too long, you risk missing out on gains during bull markets. Let’s take a look at the basics of dollar-cost averaging versus market timing.

Dollar-Cost Averaging Basics

What is dollar-cost averaging? Dollar-cost averaging means buying into the markets over time at set intervals. It usually involves moving cash or cash equivalents into productive investments like stocks or bonds.  So, you buy more shares when prices are low and few shares when prices are high. Generally, it helps to set up a schedule beforehand. Then you can usually automate the process, or at least remove the guesswork. So what are the pros and cons of dollar-cost averaging?

Pros: DCA is generally a safer. Using this method can help preserve capital in down markets. Automating the process of dollar cost averaging is also an advantage. If you have a 401(k) you are probably already using a DCA strategy…buying into your investments every two weeks or every time you get paid.

Cons: Some think it’s too passive. If you DCA during bull markets, you might forgo capital gains while you sit on excess cash. It can also be difficult to maintain the discipline necessary to buy your investments on a regular basis. Automation helps.

Market Timing 101

What is market timing? Just what it sounds like. You try to get in and out of the market at the right time, predicting tops and bottoms and taking profits when you can. Here are the pros and cons:

Pros: Bigger gains. Market timing is a more aggressive technique. So, there is greater potential for capital gains. For example, it would have been a great idea to go all in to stocks right around March of 2009.

Cons: Bigger losses. More difficult and advanced strategy. Most people can’t call market tops and bottoms accurately forever. It can be dangerous if you go all in at the wrong time, specifically near market tops. Going all in on stocks in late 2007 would have been a bad decision.

Which is best, which one should you use? Some people like to market time, and some are successful at it. But market timing is better for investors that are more sophisticated. Dollar-cost averaging is good for newer investors since it’s a more passive approach, although it does take discipline to do correctly.

Hypotheticals

For example, let’s say you have $50,000 that you want to invest. You don’t feel comfortable investing all that money into the markets at once. So, you might set up a DCA plan to invest $5,000 into your existing investment portfolio every three months. On that schedule, you’d be fully invested after two and a half years. That way you might preserve your capital while slowly investing into the markets. If you wanted to be more aggressive, you could invest larger amounts over a shorter period. If you wanted to be more conservative you could invest smaller amounts over a longer period.

Or you could use market timing strategies. If markets looks dangerously high, you could sit on the cash for a while instead. Wait for the markets to pull back and then buy in when you think it’s bottomed out. But again…if you invest in a false bottom and commit all your capital at once you run the risk of large losses. You can adjust these strategies however you want. You can also combine the two…

Hybrid Investing Strategies

Maybe you think the markets are almost done with a bear phase and due for rebound. But you’re not exactly sure when that will happen. Instead of going all in, you could start easing into the markets on a normal DCA schedule. Then once you see markets get better you might commit a bigger chunk of cash….in addition to your regular DCA schedule. Or maybe start with accelerated DCA purchases for half a year, every month until you’ve invested what you want. Then after that you could revert back to your normal schedule once you’ve got your excess cash committed.

The point is, you can combine the best aspects of both strategies to your advantage. So…you can keep a regular DCA schedule and engage in market timing as well.

It’s hard to say which approach is best. DCA and market timing both have pluses and minuses. A lot of it has to do with your temperament. Are you an active investor who enjoys paying close attention to the markets? Then market timing might work for you. But if you’re a more passive investor, dollar-cost averaging might be the way to go, and of course there is the hybrid strategy.

I personally lean towards a sort of hybrid, depending upon what I am investing in. If there are no specifics deals at the time I have now problem holding onto some cash until stocks I am tracking reach my price point, or simply putting all or a portion of it into a diversified ETF.

Investing During Uncertain Times

Every day it feels like the world is a little more interconnected. If you stay up to date via a financial television channel or read the news online, you are most likely aware of how events in one country seem to have an continually increasing effect on other countries around the world. 

Certain aspects of globalization can have positive benefits, but threats of a financial crisis, war, global recession, trade imbalances, etc. do occur, and it often leads to the talk of moving money to safer investments and increasing government deficits. This increase of uncertainty can confuse even the brightest and weathered investor.

The Impact of Uncertainty on Investing

Any time you invest your money you put it at risk in an attempt to profit, there is a certain level of uncertainty. When new threats such as war, recession, or the current virus arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings.

As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other asset classes such as precious metals, government bonds, and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to go down.

Uncertainty is the inability to forecast future events. People can’t predict the extent of a possible recession, when it’s going to start/end, how much it will cost, or what companies will be able to make it through unscathed.

Most companies normally predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing uncertainty levels can make these numbers significantly inaccurate.

Micro Level Risks

From a micro-level, company-specific viewpoint, uncertainty provides a major concern for those that produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, gadgets, and other non-essentials.

This uncertainty may force companies in certain sectors to lay off some of their employees to combat the impacts of lower sales. The level of uncertainty that surrounds a company’s sales also extends into the stock market. Consequently, stock prices of companies that produce non-essential goods sometimes experience a sell-off when levels of uncertainty rise.

Macro Risks

On a macro-level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world’s oil. Should this country go to war, uncertainty regarding the level of the world’s oil reserves would grow. Because the demand for oil would be high and the supply uncertain, a country unable to produce enough oil within its own borders would be required to ensure that enough oil was stored to cover operations. As a result, the price of oil would increase.

Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain.

Investors attempt to move their currency away from unstable sources to stable ones; the currency of a country under a threat of war may be sold and the currencies from countries without the threat are bought instead. The average investor probably would not do this, but the large institutional investors and currency futures traders would. These actions translate into a devaluation of exchange rates.

Investing Strategies for Uncertain Times

When situations of heightened uncertainty arise, the best defense is to be as well-informed as possible. Keep updated by following news that impacts markets and researching individual companies. Analyze which sectors have more to gain and lose in a crisis, and decide on a long-term plan.

Investing in gold has been a popular strategy during hard economic times, primarily because gold has an intrinsic value.

Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to go on the offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the long run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities.

Diversification is always a key investing tactic and not only in times of uncertainty. Having your investments spread across a variety of assets, such as stocks, bonds, and precious metals, helps soften the blow if one area depreciates quickly.

Furthermore, investing in different regions and different sectors and industries also increases diversification. For example, if you had all of your investments in oil companies and oil prices took a dive because of an outbreak of war in the Middle East, you are at a significant risk of loss. Now, if you also had investments in the technology sector and renewable energy, your portfolio would not be impacted as much.

The Bottom Line

Regardless of which strategy you choose, you can’t go wrong over the long term by keeping yourself well-informed in a position to take advantage of prices when things reverse. Being able to keep on top of news and adjust your portfolio accordingly will help you to invest wisely during uncertain times.

5 Tips for Retirement Savings

#1: Don’t Take Early Withdrawals

If you take distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty, double ouch.

If you want to avoid penalties and taxes, you should do everything in your power not to take early withdrawals. Plus, the longer you keep your money in the account, the more your investment can grow giving the power of compounding that little bit longer to work.

#2: Don’t Touch Your Roth IRA EARNING

With Roth IRAs, the rules are a bit more complicated. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.

Withdrawing earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings… WOW that hurts!

So, while it’s perfectly acceptable to dip into your Roth IRA contributions to pay for an emergency, you should keep your hands off those earnings unless it’s absolutely necessary.

#3: Convert to a Roth IRA

If you have money in a traditional IRA or 401(k), the smart move is to convert your accounts to Roth IRAs.

With a traditional IRA, Uncle Sam will force you to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them.

How do you get out of taking RMDs? Convert your account to a Roth IRA. Unlike traditional IRAs, you are never required to take distributions from your Roth account, so you can let your investments grow as long as you want.

Weirdly enough, if you have a “designated” Roth 401(k) account, you’ll also be subject to RMDs. Luckily, you can roll your Roth 401(k) funds into a Roth IRA when you hit 72.

When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions.

#4: Keep Your Distributions As Small As You Can

If you have your money in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which will cost you even more in taxes.

Related:  5 Tips for Retirement Savings

#5: Generate Passive Income Through Rentals

One of the most underused retirement strategies is investing in rental properties. If you’re a BiggerPockets reader, you probably already knew this. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.

That means you can use your real estate investing know-how and strategic connections to find the best real estate opportunities. Once you’ve scored some great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings.

Is It A Good Time To Sell Your Home?

The uncertainty of the global economy at the moment has created a unique and complex set of circumstances which mean that if you do have the need, it is very cheap to borrow money at the moment.

The most obvious way to leverage these very low interest rates is to get a mortgage and buy a home, which is why more first-time buyers are house hunting and getting on the ladder right now. But what about if you already own property; is now a good time to sell?

Low Rates, High Demand

The fact of the matter is that when mortgage rates are low, the demand for housing is high, which in turn means that sellers can achieve more appealing asking prices for their property without fear of putting off prospective buyers.

Of course things can change quickly, so keeping an eye on the current mortgage rates using a site like Moneywise is a good idea if you are aiming to pick the perfect moment to sell, or avoid an upcoming slump in demand driven by rate hikes.

When you do sell your house, the strong demand fuelled by low rates will mean you have more money to play with when choosing your next property, although of course the knock-on effect will mean that prices here will also be higher. If, on the other hand, you are selling an investment property, this will be less of a concern.

Related: How To Get The Lowest Mortgage Interest Rate Possible

Increased Competition Catalyzes the Sales Process

Another reason to sell your home in today’s market is that increased demand from buyers means that there is more motivation amongst those in the market to push through sales and make decisions quickly, rather than dallying and delaying as they might do in more stagnant circumstances.

If you are still living in the property when it goes up for sale, this will also mean that you are less likely to have your routine disrupted by the need to allow agents in to handle viewings, or to get out of the way altogether to facilitate an open house event.

Likewise with buyers looking to lock in deals on homes before they are beaten to it by anyone else, they will be more amenable to playing by your rules, such as settling on a moving date that suits you, rather than being pushy and imposing their own will on proceedings.

Refinancing is an Option

One side effect of the state of play in the housing market today is that home owners who do not necessarily want to sell up, but still want to take advantage of low interest rates, may consider refinancing instead.

Lenders will be more likely to let you borrow against the value of your property, and do so without having to stretch your monthly budget much further. This will not suit everyone, but does present an intriguing alternative take on current market conditions which still put sellers in the driving seat.

In short, it is all about understanding the balance of power and where it lies. Today’s housing market is great for sellers, since low rates lead to more lending and an uptick in those looking to buy.

This is not going to be the case indefinitely, so it is better to strike while the iron is hot, rather than procrastinating until it is too late and the opportunity has passed you by, whether you are selling a home or hoping to buy one from a motivated and experienced vendor.

Should You Use A Debt Consolidation Loan?

If you’re weighed down by debt and struggle to see a way out, you may have considered a debt consolidation loan at some point. By consolidating multiple debts into a new loan, you can lower stress on yourself by not needing to tack several payments every month which can greatly simplify your finances, and even lower your monthly-out-of-pocket expense.

Also, if your debts were really out of control, debt consolidation may even offer a way to save yourself from debt collections, ruining your credit, or even bankruptcy.

Let’s take a look whether debt consolidation is right for you and what other options you may have.

Disadvantages of Debt Consolidation

Consolidating your debts is one option to consider, but it doesn’t make sense for everyone. In fact, if your circumstances aren’t favorable, debt consolidation can often compound the problem of too much debt for many people, due to the way the process works.

Here are some key reasons debt consolidation is not normally the best path to getting out of debt:

Debt consolidation may not lower your interest rate.

While it’s true that debt consolidation can help you merge all of your debts by getting a loan with one monthly payment, you may not actually be saving money once everything is said and done. If you don’t secure an annual percentage rate, or APR, that is considerably lower than the weighted average interest rate you have now, you could pay the same amount of interest, or easily more, depending on the details of your new loan.

You make have a longer term loan.

Depending on the terms of your new debt consolidation loan, you may actually extend your repayment timeline. If that’s the case, you’ll spend even more time in debt than you are spending now, plus potentially pay more interest as well. For some this may be a necessary evil, but there are likely other options to consider, like a side hustle.

You may gain a false sense of accomplishment.

Debt consolidation usually leaves people feeling relieved they reduced the number of monthly payments they need to make each month. Since you still carry the same amount of debt, however, this feeling can give you a false sense of accomplishment. You didn’t pay any debt off by consolidating it; you simply moved it around.

It doesn’t change what got you there, old financial behaviors to tackle.

The biggest disadvantage that comes with debt consolidation is that it doesn’t help anyone change their behavior in the long run. If you ran up dozens of credit card balances and consolidated them for peace of mind, what’s to convince you not to do the same thing again? Without a long-term plan to avoid debt and change your spending habits, you could easily end up worse off than when you began. There is nothing worse than getting this new consolidated loan just to go straight out to putting everything on the credit card.

Alternatives to Debt Consolidation

If you’re worried that debt consolidation won’t actually leave you better off, there are several alternatives to consider instead. While each of these options also has their own set of disadvantages, they may make more sense in the long run.

Alternative #1: Sign Up for a Balance Transfer Credit Card

While formal debt consolidation offers a way to consolidate several credit card balances and loans into one new product with a single monthly payment, you can often accomplish the same thing with a balance transfer credit card.

Even better, most balance transfer credit cards let you pay zero percent interest during an introductory promotional period. And during the time your balance isn’t accruing any interest, every cent you pay towards your new loan goes directly towards the principal. While there are a whole lot of balance transfer credit cards on the market, NerdWallet offers an easy way to compare some great options.

How to Make a Balance Transfer Credit Card Work for You

In a lot of ways, using a balance transfer credit card might be a band-aid solution. If you don’t use your time wisely and actually pay off your debt, you can end up in the same spot – with lots of debt at a high interest rate – once your introductory offer expires. Here are some steps to take if you want to take full advantage of a balance transfer offer:

Make sure you get the right balance transfer credit card for your needs.

In addition to the two balance transfer credit cards featured in this post, there are many other top balance transfer credit cards to consider. Make sure to research them all, noting the fine print and terms and conditions, but also taking special care to understand the terms of their introductory zero percent offer.

Transfer all of your debts to your new balance transfer credit card.

To get the most out of your new balance transfer credit card, make sure you transfer as many high interest balances as you can. With as much of your debt at zero percent interest as possible, you’ll be in the best position to pay down your total debt load faster.

Pay as much you can towards your new balance each month.

Once you transfer your high interest balances to a card that offers zero percent interest, your minimum monthly payment on those debts should decrease. However, you should keep paying as much as you can each month no matter what. If you don’t repay your balances during the zero percent interest introductory offer, you won’t be much better off when it’s over.

Don’t use your credit card for regular spending. Use cash instead.

Although some balance transfer credit cards offer rewards on your everyday spending, you shouldn’t use your new balance transfer credit card for purchases until you are debt-free. If you keep using credit to buy items you cannot afford, you will never get out of debt! Keep your balance transfer credit card in a drawer or in your freezer for safe keeping, and refrain from using any other credit cards while you’re still in debt.

Alternative #2: Debt Snowball and Debt Avalanche Methods

Debt consolidation can help you merge all of your debts into a single loan, but that doesn’t mean it will actually save you money. In almost every case, you would be better off paying your debts off the hard way – as in, using your own money to absolutely destroy the loans you have – one by one.

Generally speaking, there are two ways to approach debt repayment – the debt snowball method and the debt avalanche method.

The debt snowball method is by far the most popular debt repayment method since it helps you score small wins right away. With this method, you’ll list out all of your debts in order from smallest to largest regardless of their respective interest rates. Once your debts are listed in this order, you’ll work up a budget that allows you to pay the minimum payment on all of your debts except for the smallest one. When it comes to your smallest debt, you’ll pay as much as you can each month until it’s paid off.

As each small balance gets knocked down to zero, you’ll move on to the next smallest balance throwing all you can at it. In the meantime, you’ll continue making minimum payments on the rest of your debts. Over time, your smallest balances will disappear, leaving only your largest balances in their wake.

The debt avalanche method, on the other hand, takes the opposite approach. Instead of listing your debts from smallest to largest, you’ll list your debts by interest rate instead.

With the debt avalanche, you’ll pay the minimum payment on all of your loans with the lowest interest rate every month while paying as much as you can towards the balance with the highest interest rate. Over time, your loans with the highest rates will disappear, leaving only the loans and balances with the lowest interest rates.

With both the debt snowball and the debt avalanche, you will keep powering through until all debt is paid off.

See also: Debt Snowball VS Debt Avalanche: Choosing the Right Strategy for You.

How to Make the Debt Snowball and Debt Avalanche Work for You

With both the debt snowball and debt avalanche methods, a certain amount of self-restraint is required for the process to work. Not only must you stick to the plan and work as hard as you can to repay your debts, but you have to stop digging as well. Here are some tips that can make paying off your debts the hard way a reality:

Stop using credit altogether.

One of the biggest problems people face when they try to get out of debt is avoiding new debt. If you’ve become accustomed to overspending, it’s hard to break that habit and focus on paying off debt instead.

The best way to ensure you don’t dig a deeper hole is to quit using credit altogether while you work your way out of debt. Stick to a cash budget instead if possible, and avoid using credit cards. You can do this!

Make sure your partner or spouse is on board.

If you want to improve your chances for success, it’s smart to sit down with your spouse or partner to make sure everyone is on board. Without their support, you could end up making little progress, or worse, growing your debt load larger over time.

Sit down your spouse or partner and discuss your future, showing them how getting out of debt can improve both your relationship and your lifestyle. With their help, your chances for success will increase tremendously.

Cut your spending to get out of debt faster.

Since you’re in debt and already struggling, it’s safe to say you’re already spending more than you can afford each month. To get out of debt faster – and to give yourself peace of mind – it’s crucial to look for ways to cut your spending every month.

When you first get started, look for the low-hanging fruit. If you’re overspending on food or entertainment, those are areas that are fairly easy to cut. Conversely, you can also check past month’s bank statements for other “budget drains” including lifestyle habits like smoking or shopping.

Stick with the plan until you’re entirely debt-free.

Getting started on the debt snowball or debt avalanche method can feel exhilarating if you are tired of being in debt, but you have to commit to the program for the long haul if you want it to work. If you don’t, you could easily wind up getting off track and racking up more debt.

Final Thoughts

If you desperately want to pay off debt, it’s important to know that debt consolidation isn’t your only option. In some cases, you might be much better off paying your debts off the hard way. In others, a zero interest, balance transfer credit card might help you speed up the process.

At the end of the day, it’s up to you to figure out which option works best for your lifestyle and goals. And no matter what, there is no right answer for everyone. Before you pull the trigger on a debt consolidation or balance transfer credit card, make sure you know what you’re getting into. In addition, you should make sure you understand yourself and your limits.

5 Things To Ditch To Get Debt-Free In 2021

It’s January again, and the 2020 holiday craze is already becoming a distant memory. If you came into the year looking to improve your financial position, you may find your resolve beginning to falter, or you may seem overwhelmed at the task at hand.

Don’t give up! You still have three-quarters of the year left to become debt-free in 2020. But you have to be willing to make some real changes. Here are 5 things to give up if you want to achieve your debt-free goal this year.

1. Not Tracking Your Money

Budget spreadsheets probably aren’t at the top your list of preferred entertainment. But if you actually want to become debt-free this year, you will need a better method than flying-by-the-seat-of-your-pants.

There is something relieving about getting all that spending written down and categorized, rather than just lurking in some corner of your brain always there judging you. And it is empowering to realize you’ve compiled an actionable set of data that can help you make better choices, getting yourself on the  path to achieving financial freedom.

So, where do you start? There are a lot of great online tools, of course. Mint, Personal Capital, and other similar websites can automatically sync with your bank accounts, credit cards, and so on. These are great options when you’re in a strong financial situation and just want to ensure things are staying on track.

However, if you’re working to dig yourself out of debt, I recommend using a simple spreadsheet that requires you to be more hands-on with your tracking. Google “budget spreadsheet,” and you’ll find plenty of free options.

2. Subscriptions

You’ve found a way to track what you make and what you spend. Now that you have an idea of your monthly spending, let’s go after some low-hanging fruit.

Subscriptions are an expense category that can sneak up on you because you sign up once, set up your automatic payments, and then kind of forget about it. Most of these subscriptions aren’t really that expensive—cable and internet for $100 per month, SiriusXM for $15 per month, a gym membership for $35 per month. None of these will make or break your finances on their own.

Related: 7 Tips to Organize Your Finances

However, many people may be surprised at how quickly all their small, “inexpensive” subscriptions add up. You may find several hundreds of dollars going to subscriptions that you don’t use or could easily live without for a while.

Seek out all your recurring payments as you work through your first month or two of budgeting. Can you cancel these subscriptions and still be happy? Could you cancel them just long enough to get out of debt?

Be honest with yourself, and you may find a good chunk of change to put toward your monthly debt payments.

3. Expensive Eating

Hate is a strong word, but I really don’t like cooking. I don’t find it relaxing. I don’t like the mess. I hate shopping for the groceries.

If I could find a healthy and budget-friendly way to avoid ever having to cook, I would do it. But the reality is, restaurants and prepared foods are much more costly than getting raw ingredients and making something yourself. This is especially true for those of us with children.

According to the latest data from the U.S. Bureau of Labor and Statistics, the average American household spends about 13 percent of its income on food—both groceries and dining out. If you’re looking to free up money in your budget, my personal rule of thumb is to start by looking at spending categories that take up 10 percent or more of your budget. Based on the statistic above, food will be a category where most Americans can look for opportunities to save.

If you are trying to get out of debt, but you spend 10 percent or more of your income on food, it’s time to bring down your average meal cost. This means less dining out, less prepared food, and maybe even switching grocery stores. It means smart grocery shopping, meal planning, and cooking.

Fortunately, many lifestyle and personal finance bloggers have done the heavy lifting for us! The internet can be your best friend when it comes to finding ways to lower your food expenses. I’ve found more tips, recipes, and meal plans than I can count just by doing a quick Google search.

To my delight, many of the ideas involve easy slow cooker recipes (throw in some basic ingredients, set it for 6 to 8 hours, and go about your day) and weekly plans that suggest making enough food for leftover meals.

4. Car Payments

If you want to better your financial situation, it’s time to join the high mileage club! Remember that U.S. Bureau of Labor and Statistics data? It shows that the average American household spends another 16 to 17 percent of its budget on transportation. While this figure includes fuel and upkeep, the majority of that transportation budget goes to car purchases and payments.

You’ve probably seen people post photos of their pristine, brand new cars on social media. Nice vehicles are undoubtedly a status symbol in our culture. However, did you know there’s a group of people who pride themselves on having old, inexpensive, reliable vehicles? Check out any FI (financial independence) group on Facebook, or follow financially savvy personalities on Instagram, and you’re bound to see people proudly posting photos of their car’s odometer at 100,000 miles, 200,000 miles, and higher!

Why all this excitement about a 2002 Honda Civic with 276,000 miles on it? Because it represents all the money that these high mileage car owners have been able to save and invest instead of spending it on car payments.

Many financially fit people purchase gently used vehicles, have little-to-no debt on the car, and drive them for as long as they can. Some even buy cars for just a few thousand dollars that are already 10 years old with six-figure odometers and manage to drive them for another 10 years.

Do you have to buy a vehicle from the 1990s to get out of debt? Probably not. But could you save hundreds of dollars in car payments per month by trading in your new 2019 vehicle for a 2014 that will run just as well? Absolutely!

5. Expensive Housing

Let’s look at one final fact from that U.S. Bureau of Labor and Statistics data. The average American household spends a whopping 33 percent of its income on housing, making it the single largest expense for most of us each month. Changing your housing situation can help you pay down debts, although it comes with its own set of challenges.

Moving can involve some upfront costs, and it can take time to sell, sublet, and figure out your next move. And if you’re renting or you own a home that you really love, it can be an emotional process, as well. You have to remember why you’re doing it!

Can you handle living with family for just one year if it means you’ll finally be rid of your debt? Could you spend $1,000 to move to a smaller, more budget-friendly home if it means you’ll have an extra $500 per month to put toward paying off your debt? Can you find a way to house hack so that your living costs are dramatically lower than everyone else you know?

You Can Do This!

None of what I’ve shared today is very complicated. It just takes commitment, putting in the work, and maintaining a good mindset to see you through the days when you just want to give in and live with debt forever.

Keep educating yourself. Seek out communities (online and otherwise) that allow you to surround yourself with encouraging voices on your journey. Think about the weight that will be lifted from your shoulders when you’re finally debt-free.

Passive Income With Real Estate Mortgage Notes

Let us dig deeper on a portion a real estate investing.. real estate note investing! Investing in real estate notes is a unique alternative to owning actual property. If it’s your goal, a note portfolio can generate completely hands-off passive income.

What Is a Promissory Note?

A promissory note (more often simply a “note”) is a formal IOU from a borrower promising to repay a debt. The note spells out the loan terms, and the borrower signs it to indicate their consent.

A note specifies many things most importantly who the borrower and lender are, the amount borrowed at what rate and how it will be repaid, also what happens if it goes into default.

  • The borrower and the lender
  • The amount borrowed
  • The interest rate
  • The repayment schedule
  • The date and location of issuance
  • What happens in the case of default

Once the borrower issues the note, the lender holds on to it while the loan is outstanding. Anytime before the borrower makes the last payment on the loan, the lender can trade or sell the note. Once the borrower fully pays off the loan, the creditor marks the note as “paid in full” and returns it to the borrower.

Lenders and borrowers can use promissory notes to memorialize various types of loans, but since we’re all real estate investors here, I will just be discussing mortgage notes.

What Is a Mortgage Note?

Mortgage notes are associated with home loans and secured by the real estate purchased. When someone takes out a mortgage, the bank or lending institution will usually have the borrower sign both the mortgage agreement and a promissory note.

Some states use deeds of trust instead of mortgages, but for our purposes, they’re essentially the same. In short, the promissory note captures the loan terms; the mortgage or deed of trust secures it with the real estate you’re purchasing. The lender will record their lien by filing the mortgage at the county land records office, but they’ll hang on to the note.

While promissory notes and mortgages are two separate documents that serve different purposes, they have a symbiotic relationship of sorts. You won’t find one without the other. Notes and mortgages are the peanut butter and jelly of the real estate financing industry.

What Does It Mean To Invest in Mortgage Notes?

Purchasing mortgage notes is an often overlooked method of real estate investing. Unlike hard real estate purchases, you don’t own any property with a note-based strategy. Instead, you step into the bank’s shoes and become the borrower’s new creditor. When you invest in notes, you buy debt, not real estate.

Where Can I Find Mortgage Notes To Buy?

You can purchase notes on the secondary market. What that market looks like depends on whether you want to take a risk on a non-performing note or play it safe(r) with a performing one.

Types of Mortgage Notes

Non-Performing Notes

Remember, investing in notes equates to buying mortgage debt. As we all probably know a little too well, some people pay their debts on time, while others do not. If the borrower is behind on their payments or in default, the loan is considered non-performing.

If you invest in a non-performing note, your ROI will likely depend on a foreclosure or collections. Due to this type of investment’s inherent risks and the work involved, banks are often willing to part with non-performing notes at a discount—and sometimes a substantial one. If you are confident in your ability to navigate the waters of foreclosure or collections successfully, non-performing notes might be the way you want to go.

Performing Notes

Purchasing notes for mortgages with a steady track record of on-time payments are generally safer and less involved investments. When the borrower makes their payments on time, and the loan is not in default, it’s considered performing.

Related: How to Passively Invest in Real Estate

The appeal of performing notes is that investors can start receiving payments almost immediately—minimal effort required. However, since these loans are making money, you won’t get as big of a discount as you would for a non-performing loan, so your ROI will usually be lower.

Are Mortgage Notes a Good Investment?

The reasons investors are drawn to real estate notes vary, depending on their investment strategy. An appealing feature of performing real estate notes to many investors is the hands-off nature of the purchase. Since you don’t own the property, you don’t have to deal with tenants or property managers, make repairs, or worry about city codes. You just get to kick back, put up your feet, and collect the borrower’s payments.

If you invest in non-performing notes, you’re probably going to have to get a little more hands-on to get the ROI you want. Investors that take this route view non-performing notes as a way to pick up real estate on the cheap.

No matter your approach, real estate notes can be an exciting addition to your portfolio.

7 Millionaire Habits To Begin In 2021

You like many others may feel overwhelmed with what tools, techniques or philosophies to follow and learn from in your financial journey. Everywhere you look, there are ‘how-tos and quick fixes’ on achieving seemingly overnight success. You will find several courses, articles, videos and books on how to achieve financial success.

Thomas Corley studied millionaires and the poor for over five years and the result is his book: Rich Habits: The Daily Success Habits of Wealthy Individuals,

Unsurprisingly, Mr. Corley found some major differences in millionaires and average people. An eye opener in this are the traits that set millionaires apart have little to do with money itself. The most common things many millionaires shared were simple daily rituals that over time, lead to improved productivity, health, relationships, knowledge and wealth.

What if you could achieve success by merely following these 7 millionaire success habits?

1. Track Your Money

They average millionaire does not believe leave everything up to luck. They fully understand their cash flow and when they need to throttle their spending or make adjustments in an area. With this heightened awareness of their finances, they establish a monthly budget and stick to it.

The goal of the budget is to minimize unnecessary expenses. This has very powerful in helping you gain complete control of your financial life. Budgeting helps you to avoid overspending by always knowing where you stand financially in relation to your goals.

For those who really struggle with budgeting try this: Budgets Suck. Do This Instead.

2. Read and Never Stop Learning

A daily habit that most millionaires share in common is reading. Whether you are an entrepreneur, investor, or working your way up in your line of work, you need to read to become more effective leader and a productive business owner. Reading helps you to grow and learn without requiring the time and money in traditional routes of education, like college.

Research by Thomas Crowley indicated about 85% of self-made millionaires read at least two or more books each month.  Warren Buffett is one of these examples. He spends much of his day reading.

Millionaires do sometimes read for pleasure, but they also read to learn how to improve themselves. They read topics on leadership, investing, self-help, biographies, and stay current on world events.

3. Manage and Maximize Money

The most significant education for a millionaire is in developing their financial intelligence. You’re not likely to just happen upon financial freedom without gaining financial intelligence. This is can be seen in their ability not only to save and invest their money but to control typically everyone’s greatest expense in life, taxes.

They always seek to reduce their tax bills. One approach they employ is by living or incorporating their business in states with no income tax, investing in tax efficient accounts, and tax efficient investment vehicles throughout life.

4. Establish Multiple Sources of Income

Another habit of people is that they aren’t reliant on a single income source. Nearly every millionaire possesses multiple sources of income. This helps them to manage economic challenges and also make more money.

They have a focus on passive income with the limited time required to maintain it and its ability to compound while they focus efforts elsewhere, be that time with family, working their job, or building the next business.

They earn interests from loans, rental income from real estate, royalties from intellectual properties, and dividends from investments.

How income is made either passively or actively is what separates their success from those who never make it. They are continuously striving to learn ways to build multiple streams of income.

5. Set Daily Goals

It does not matter if they are setting up a business, a career, or financial projections; they have the success habit of setting short term goals. They plan daily and weekly goals to generate momentum in achieving their long-term goals.

Ensure you prioritize when setting daily goals. This will help you to achieve the most important to-dos on your list.

Setting priorities will help you to focus on highly rewarding activities. If you desire financial freedom, it is wise to pursue activities that earn you thousands of dollars rather than hundreds of dollars.

6. Avoid Debt

Another habit that separates the millionaires from the rest of the world is how they manage debt. Earlier we mentioned having a budget and avoiding bad debt, like credit card and other high interest consumer debt, makes managing their finances much simpler.

They don’t live above their means; instead, they only buy what they need and can actually afford to pay for. They aren’t out there maxing credit cards to buy new flashy things and often buy reasonable slightly used cars.

They are conscious of the interest rates even when they use credits cards or take loans. If possible, they try to pay with cash because they pay no interest there.

7. Don’t Act Rich

The goal is not to act rich but to be productive. Thomas Stanley buttressed in his book that for the most prestige brands of cars, about 86% percent are toys of the non-millionaires. While most believe that people with huge fortunes tend to drive exotic cars, in reality the largest consumers of pricey cars are aspiring millionaires (But likely not financially on the right path).

According to findings by Experian Automotive Researchers, 61% of individuals who earn $250,000 or more rarely buy luxury brands. they instead buy Hondas, Toyotas, and Fords like the rest of us. The reason is they are not ready to spend money on premium cars that tend to drop in value in a couple of years instead opting to spend much less on slightly used vehicles allowing them to invest much more into their portfolio or business.

Summary

What’s interesting about these daily rituals of millionaires? I think the main takeaway is that building wealth doesn’t necessarily equate with just sound investment strategy or working extra to make extra money.

Note how many items on this list revolve around general self-improvement, like he mentions in the book by likening it to sharpening a saw or honing a blade it takes time to see dramatic results. Better brain power, better nutrition, and better screen habits create needed room to embrace financial success.

Pay Yourself First in 2021

If you haven’t read George Clason’s The Richest Man in Babylon, this truly is a must read for all ages. It was written back in the early 1900s and is full of sound financial principles that are rock solid to this day.

The first idea Clason discusses is that a part of what you earn is yours to keep, in other words pay yourself first.

What Does Pay Yourself First Actually Mean?

You have probably heard it at some point, and like many people so often do, thought, “This is an amazing idea, I must do this!” Then like too many people do, went on your normal way, never digging deeper or implementing anything you learned of paying yourself first.

Here’s some quick, easy, actionable advice to implement right away: Take time to actually think it through, and come up with a reasonable percentage of your earnings that you are going to pay yourself, the amount is less important at this point than actually building a system which you can build on later once you’ve got momentum and developed the habit.

Write it down, and commit to paying yourself that amount each paycheck, and do this first before you pay any other bill or debt.

That’s the plain and simple concept. And that’s exactly what it’s supposed to be easy to understand and follow. If it wasn’t, you’d likely not do it at all, let alone for the long-term.

Robert Kiyosaki, author of Rich Dad Poor Dad and many other financial and business titles, tells the story in several of his books that he would always pay himself from any gain he got—no matter what. He even chose to be late on bills and other payments in favor of taking his share first, which is not necessary but shows how powerful it can be. To be expected, various people were mad and bill collectors were calling, but he ensured the principle of paying himself first was ingrained down to his core.

I do not advocate to skipping paying your bills, but do feel doing what it takes to deep down ingrain the principle to where it comes naturally and simply happens.

Why Pay Yourself First Works

You might say, “This couldn’t work. My business is different. I can’t pay myself first. I can’t change the way I’m doing things now.”

Consider this: Changing the way you think might completely change your life. You are no different, you too can pay yourself first. There really is no magic formula or secret strategy to this, just simple addition and subtraction.

When it comes to paying yourself first, it’s a basic principle that most people know but just do not practice.

I contend that you DO have the time to do this, and you can always beg, borrow, copy, or pay to figure out exactly how. This isn’t rocket science, we are talking about keeping more of the hard-earned money you make for yourself and mastering this powerful financial principle.

Take control of your financial life with this all important step and take charge of where your hard earned dollars go.

The Bottom Line

Another way to look at is by considering where you are currently, could you handle another market crash that lasted many more months or even years? Would you be fine when real estate prices take a major hit again?

If you do not and you think you don’t have the time and bandwidth to do something about it, then when the next downturn comes, you could be looking for a job yourself or letting a lot of good employees go.

Having a surplus of cash in your account and a system to manage your profit can provide both wealth and safety for you and you family. It gives you a peace of mind that you can overcome economic downturns that are sure to happen in your life. Your employees, your business, and your family will thank you when they know that you are all set to tackle whatever may come.

5 Tips for Retirement Savings

Retirement has the potential to be the best time of your life, but not having enough money saved could end up making it the worst and full of fear and stress. Financial troubles can make some new retirees even regret hanging up their hat. What they had hoped would be a relaxing vacation can quickly turn into a nightmare.

If you think you’re too young to begin thinking about retirement, think again. The earlier you’re able to start saving for it, the better off you will be. If you want to enjoy your golden years, you need to maximize your retirement savings and get time and compounding working for you!

A qualified estate planning attorney and CPA are important for helping you get the details of your individual sitiation squared away. With that said, here are several useful tips that come up over and over when looking into the topic of retirement. I hope some of these can help you make the most of both your retirement savings and your retirement.

Tip #1: Don’t Take Early Withdrawals

By taking distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty. OUCH!

To avoid penalties and taxes taking their toll on you account, you should try everything in your power not to take early withdrawals. The longer you keep your money in the account, the more your investment can grow.

Tip #2: Don’t Touch Your Roth IRA Earnings

With Roth IRAs, there are a bit more rules to withdrawals. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.

But to withdraw earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings defeating the purpose of the Roth and taking on additional fees.

While it is acceptable to dip into your Roth IRA contributions to pay for an emergency, we all know life happens, you should not touch your earnings unless it’s absolutely necessary.

Tip #3: Convert to a Roth IRA

If you have money in a traditional IRA or 401(k), the useful move is to convert your accounts to Roth IRAs.

With a traditional IRA, you will eventually be forced to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them, the government sort of got to invest long term with you and reap the rewards with you huh?

A way to get out of RMDs is to convert your account to a Roth IRA. Unlike traditional IRAs, you are not required to take distributions from your Roth account, so you can let your investments grow as long as you want.

When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s typically worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions. This is a great topic to bring up with your CPA to see if a conversion would be beneficial for you.

Tip #4: Keep Your Distributions as Small as Needed

If your money is in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which can be even more costly in taxes.

Tip #5: Generate Passive Income Through Rentals

One of the most underused retirement strategies is investing in rental properties. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.

That means for those who already have the know how and invest in real estate have a great option here. Once you’ve landed those great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings with the tax benefits afforded you by checkbook control, meaning you have complete control over how you invest.

This last tip as well as all are excellent options if utilized the right way. Make sure to consult with your lawyer, CPA, or other tax professional before making these important changes to your future.